The COVID-19 pandemic has destroyed the U.S. economy. China may have been the epicenter, but nearly 90 days after the reports started coming strong out of Wuhan, it’s the rest of the world that is suffering more at this time.
The National Association for Business Economics (NABE) issued its April 2020 flash outlook from a panel of 45 professional forecasters using results compiled during the period of April 3 to April 7. It should now be little or no surprise that the United States is in a recession, and it should not be a surprise that the forecasters are calling for a “contractionary state” for the first half of 2020. What will be a surprise to some is the degree of contraction.
One issue that clouds the first-quarter data is that the United States did not go into panic-mode until March. Some portions of the economy were operating under a gross domestic product (GDP) growth scenario through the end of February or the start of March. The NABE flash forecast is for 2.4% overall contraction in the first quarter of 2020.
Where the big jump is seen is the NABE’s forecast calling for GDP to shrink by an unprecedented 26.5% in the second quarter of 2020, and the five lowest forecasts were down at −50% GDP.
While the median forecasts of 2.0% GDP growth in the third quarter and 5.8% in the fourth quarter look positive, there is a high discrepancy between the lowest and highest forecasts. The five lowest forecasts for third-quarter GDP were calling for 12.6% contraction versus 20.7% growth, and the five lowest for fourth-quarter GDP called for a flat GDP reading versus the five highest calling for 23.6% growth.
The unemployment situation is expected to become equally as dismal, as so many businesses are closed. The median unemployment rate is expected to jump from 3.8% in the first quarter of this year to 12.0% in the second quarter, with the five highest forecasts suggesting 20% unemployment in the second quarter. The median unemployment rate is then expected to fall back to 9.5% at the end of 2020 and coming down to 6.0% by the end of 2021.
The weak labor market will act as a drag on consumer spending. The real personal consumption expenditures (PCE) are expected to remain at 1.0% annualized growth as consumers will continue to purchase necessary items. That PCE level is expected to climb to 1.6% in 2021.
Another forecast was that the Federal Reserve is expected to maintain its zero-interest rate policy through the end of 2021. The yield on the 10-year Treasury is expected to rise from 0.70% or so in the first quarter of 2020 up to 0.9% by the end of 2020 and to 1.50% by the end of 2021.
NABE President Constance Hunter, CBE, chief economist at KPMG, commented about the current expectations for beyond the second quarter of 2020. Current median forecasts are calling for 2.0% growth in the third quarter of this year, followed by 5.8% growth in the fourth quarter She said:
The panel is optimistic about a return to economic growth in the latter half of 2020, anticipating an annualized real GDP growth rate of 2.0% in the third quarter. Despite a sharp deterioration in labor market conditions, the median forecast suggests conditions will improve by the end of the year with support from aggressive fiscal and monetary stimulus, as panelists expect the Federal Reserve to hold steady on near-zero interest rates through 2021.
It may seem difficult to grasp such wide differences in forecasts, but that is how “consensus” numbers are formed and it is one of the reasons that financial markets react differently around various economic reports that are off of consensus expectations. When you get major economists and strategists from the likes of Goldman Sachs, Evercore ISI, Moody’s, Fannie Mae, Wells Fargo, Visa, Morgan Stanley, PNC and three dozen more institutions and organizations, it comes with a wide degree of ups and downs.