Past the Bottom?

Over the past month, all states have gradually started to relax lockdown policies, aiming to return to normal economic activity while keeping people safe. Against this backdrop, incoming economic data has shown mild improvement relative to the massive declines seen in March and April. The May employment report was a welcome surprise but should be read with caution.

The near-term outlook remains dismal. A slew of economic readings for April have revealed significant damage to the economy from COVID-19-related lockdowns. Real gross domestic product (GDP) is likely to contract at a rate not seen in the post-war era. Recovery should begin in the third quarter, but we do not expect the economy to recover all of the output lost until well into 2022. A renewed wave of infections (amid the recent discontent) that brings the economy to a standstill again remains a key downside risk.

Key Economic Indicators

USEO - June 2020 - Chart 1

Influences on the Forecast

  • The unemployment rate unexpectedly dropped to 13.3% and total nonfarm payrolls rose by 2.5 million in May. While the lower unemployment rate was a welcome surprise, the employment situation remains difficult. Initial jobless claims are declining but remain elevated; nearly 43 million people have filed for regular unemployment insurance since the crisis took hold, and more than 6 million have filed for Pandemic Unemployment Assistance (for jobs not normally eligible for unemployment benefits). We expect the unemployment rate to continue to recover, but to hover in double digits for the most of the year and stay well above pre-crisis levels even in 2021.
  • Real GDP for the first quarter was revised by two-tenths, to -5.0% on an annualized basis, as inventories proved to be a bigger drag than initially reported. Incomes have surged, thanks to government support payments, but much of it has been saved rather than spent. The U.S. saving rate rose to a record level in April. We expect real GDP to drop at an annualized pace of about 40% in the second quarter, and then follow a recovery that will be graded by curves.
  • As expected, the Federal Open Market Committee, at its June 9-10 meeting, made no major policy announcements and decided to keep its foot on the gas as inflation and employment objectives remain far from desired levels. The Federal Reserve didn’t expand any of its current programs, but Chair Jerome Powell faced some questions about the Fed’s range of facilities to support financial markets. Recently, the Fed expanded its $500 billion Municipal Liquidity Facility to a wider range of local governments, cash-strapped airports and public transit agencies.