As the coronavirus pandemic continues to hit all sectors of the American economy, S&P Global Economics is now forecasting the U.S. economy will contract 5.3% this year.
According to a report published Friday entitled An Already Historic U.S. Downturn Now Looks Even Worse, S&P sees an historic annualized GDP decline of almost 35% in the second quarter.
“Our full-year figure is now much worse than our March forecast for a 1.3% decline and significantly off our December forecast of a 1.9% gain,” said Beth Ann Bovino, U.S. Chief Economist for S&P Global Economics.
Meanwhile, Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy, and U.S. Economist Roiana Reid, see an even steeper decline for the full year.
“We forecast that U.S. real GDP will decline by 7.4% in 2020, a 22% annualized decline in the first half followed by an 8% increase in the second half — reflecting the widespread mandated shutdown of nonessential businesses activities and expected very gradual step-by-step reopening of various activities,” they said.
S&P noted that its latest report came as more than 90% of the American population under stay-at-home restrictions.
“Social distancing has brought second-quarter consumer spending to its knees, with the total plunging 33.5%. Business investment, too, is suffering from lost demand and reduced production tied to business closures,” S&P said.
S&P said the current recession “has likely reduced economic activity by 11.8% peak to trough, which is roughly three times the decline seen during the Great Recession in one-third of the time. Headline unemployment could reach 19% in May, which would be closer to the reported Depression-era peak of 25% than to the 10% high during the global financial crisis.”
And the economic revival will be slow, S&P said.
"Recovery will be gradual as fears linger and social distancing endures, but we expect the economy will at least partly reopen in the third quarter," Bovino said.
Levy and Reid said while the economy is expected to gather steam by year-end 2021, it will not be back to where it was before the crisis.
“The unemployment rate is expected to surge to over 18% by May, reflecting the massive 17 million increase in initial jobless claims between March 15 and April 4, and expected further increases in subsequent weeks,” they said.
They added that not all workers will be rehired in the second half of this year and in 2021.
“By year-end 2021, the unemployment rate is projected to fall to 9.1%, more than double its 3.5% pre-crisis rate,” they said.
They added that when businesses do reopen, they will employ measures to encourage social distancing and will be operating at less than full capacity for some time.
“Different regions will reopen at different times. For densely populated cities that rely on mass public transportation (New York), the reopening process will be complex,” they said.
“In just the past four weeks, total weekly unemployment insurance claims were higher compared to any point in the 1990s and 2001 recessions and exceeded the first 50 weeks of claims in the 2008 to 2009 Great Recession,” according to a report from the Tax Policy Center.
“So many unemployment insurance claims in such a short period of time put an enormous administrative and financial burden on states,” said the TPC’s Lucy Dadayan and Donnie Charleston. “They must process and pay claims and provide those who have lost their jobs various public benefits, all while their revenue base is falling rapidly.”
They said that while Congress provided some funding for unemployment benefits as well as some other financial support to the states, it is far less than what the states need.
“It is likely to take many months — or even years — for an economic recovery to fully take hold. If commerce can gradually resume, we may see a slowing of the rate of new unemployment claims, but it will be a long time before those 20 million newly unemployed will be back to work,” they said.
S&P noted that the Federal Reserve's unprecedented stimulus and unparalleled fiscal support is providing a lifeline to the economy.
“The government's latest $2 trillion stimulus measure, the biggest economic relief package in history, won't stop the ongoing recession, but it could reduce the risk of an even deeper recession and support a post-virus rebound in activity as bridge payments help tide over people and firms until it is safe to start back up again,” S&P said.
LEI falls at a record rate
The leading economic index fell 6.7% in March to 104.2, The Conference Board reported on Friday. This followed a 0.2% decline in February and a 0.4% increase in January.
“In March, the U.S. LEI registered the largest decline in its 60-year history,” said Ataman Ozyildirim, senior director of economic research at The Conference Board. “The unprecedented and sudden deterioration was broad based, with the largest negative contributions coming from initial claims for unemployment insurance and stock prices.”
The coincident economic index decreased 0.9% in March to 106.6, following a 0.3% increase in February and a 0.1% increase in January. The lagging economic index rose 1.2% last month to 110.2, after a 0.3% increase in February, and a 0.1% decrease in January. All indexes are based on 2016 = 100.
“The sharp drop in the LEI reflects the sudden halting in business activity as a result of the global pandemic and suggests the U.S. economy will be facing a very deep contraction,” Ozyildirim said.
