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US Economy Takes 1st Step Toward a Recession
May 04, 2020
Before the Coronavirus, the US economy was cruising for what looked like 3% annualized growth in real GDP in the first quarter. But the effects of both natural social distancing and government-mandated lockdowns crushed economic growth in March. As a result, real GDP appears contracted at a 4.8% annual rate in Q1, led by a massive drop in inventories as well as declines in consumer spending, business investment in equipment, and commercial construction. But the second quarter is going to be worse. Since 1947, the worst quarter in our history was a 10% annualized drop in the first quarter of 1958, on the heels of the Asian Flu. In the current quarter, real GDP is likely to drop at about a 30% annual rate, rivaling declines last seen during the late-1945 wind-down from World War II as well as the Great Depression. The unemployment rate is expected to flirt with 20%, compared to highs of 10.0% in the aftermath of the Great Recession in 2009 and 10.8% at the end of the brutal 1981-82 recession.
None of this is going to shock anyone; the markets already know it's going to be awful. The effect of the Coronavirus in the months ahead will depend on the timeline for developing therapies, and a vaccine. Real GDP for all of 2020 will be about 5.0% lower than 2019, versus the roughly 2.5% higher it would have been in the absence of the Coronavirus. In turn, federal revenue will be down, and would have been lower even in the absence of recent policy changes, like the IRS sending out checks for $1,200 per adult and $500 per child, as well as delays in employers paying their share of payroll taxes. The Congressional Budget Office recently updated its forecast for the budget deficit for the current fiscal year (ending September 30) and expects it to be about $3.7 trillion, or roughly 18% of what we estimate to be fiscal year GDP. To put that in perspective, the budget deficit hit 9.8% of the GDP in 2009 and the deficit peaked at 29.6% of GDP in 1943.
In the months ahead, there are two key pieces of macro-data. First unemployment claims. It looks like initial claims peaked at 6.9 million the week ending March 28 and have since declined three weeks in a row, to a still humongous 4.4 million the week ending April 18 and ~3.6m for the week ending April 25. .
May 04, 2020
Before the Coronavirus, the US economy was cruising for what looked like 3% annualized growth in real GDP in the first quarter. But the effects of both natural social distancing and government-mandated lockdowns crushed economic growth in March. As a result, real GDP appears contracted at a 4.8% annual rate in Q1, led by a massive drop in inventories as well as declines in consumer spending, business investment in equipment, and commercial construction. But the second quarter is going to be worse. Since 1947, the worst quarter in our history was a 10% annualized drop in the first quarter of 1958, on the heels of the Asian Flu. In the current quarter, real GDP is likely to drop at about a 30% annual rate, rivaling declines last seen during the late-1945 wind-down from World War II as well as the Great Depression. The unemployment rate is expected to flirt with 20%, compared to highs of 10.0% in the aftermath of the Great Recession in 2009 and 10.8% at the end of the brutal 1981-82 recession.
None of this is going to shock anyone; the markets already know it's going to be awful. The effect of the Coronavirus in the months ahead will depend on the timeline for developing therapies, and a vaccine. Real GDP for all of 2020 will be about 5.0% lower than 2019, versus the roughly 2.5% higher it would have been in the absence of the Coronavirus. In turn, federal revenue will be down, and would have been lower even in the absence of recent policy changes, like the IRS sending out checks for $1,200 per adult and $500 per child, as well as delays in employers paying their share of payroll taxes. The Congressional Budget Office recently updated its forecast for the budget deficit for the current fiscal year (ending September 30) and expects it to be about $3.7 trillion, or roughly 18% of what we estimate to be fiscal year GDP. To put that in perspective, the budget deficit hit 9.8% of the GDP in 2009 and the deficit peaked at 29.6% of GDP in 1943.
In the months ahead, there are two key pieces of macro-data. First unemployment claims. It looks like initial claims peaked at 6.9 million the week ending March 28 and have since declined three weeks in a row, to a still humongous 4.4 million the week ending April 18 and ~3.6m for the week ending April 25. .
- Unemployment claims are still rising every week and will likely keep doing so for at least another month. Continuing claims peaking whenever it happens, signals the bottom for the recession.
- The federal government's receipts for withheld income and payroll taxes are down around 10% from a year ago, but are very volatile from day to day.
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