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US Economic Shocker: New Forecast Sees 37% GDP Decline, Consumer Spending Down 43%

A stunning 37 percent annualized decline in gross domestic product (GDP) is expected in the second quarter, IHS Markit economists said in a new forecast for the U.S.

Joel Prakken and Chris Varvares, co-heads of U.S. economics for IHS Markit, said an upturn should begin in the third quarter, but warned that it will likely take two years to reach the prior economic peak.

Prakken and Varvares said strict social distancing mandates, supply chain disruptions and sharp declines in the energy sector due to plunging oil prices are resulting in a deep global contraction of “uncertain depth and duration.” They noted that production and employment in the U.S. and global economies are declining sharply in the second quarter, following a decrease that began in the first quarter. U.S. real GDP decreased at an annual rate of 4.8 percent in the first quarter ended March 31, according to the advance estimate released last month by the Bureau of Economic Analysis.

While a gradual re-opening of the economy has begun, somewhat limiting the decline in second quarter production, massive and broad-based layoffs of more than over 30 million people and sharp declines in many asset prices “imply an unprecedented deterioration in household economic well-being that further restrains consumer spending,” the economists said.

“On balance, we expect consumer spending to contract at a 43 percent rate in the second quarter and roughly 8 percent this year,” Prakken said. “GDP is projected to drop at a 37 percent rate in the second quarter and 7.3 percent for the year. This will drive employment losses totaling over 30 million and push the unemployment rate to nearly 20 percent by summer. The recovery will be U-shaped, with GDP not surpassing its prior peak until mid-2022.”

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Assuming the daily number of new cases and deaths from coronavirus across the country diminish to low enough numbers to permit a reasonably broad partial relaxation of social distancing mandates by June, “this will put the trough in economic activity in the second quarter, when consumer spending is expected to plunge at an astounding 43 percent annualized rate.”

“A phased re-opening of the economy has begun already,” Prakken said. “On the one hand, this is likely to make April or May the low point in consumer spending and GDP. On the other hand, studies suggest it likely will slow the decline in new cases and deaths, discouraging many consumers from resuming their pre-COVID-19 spending patterns and thereby slowing the recovery in spending.”

The job losses are expected to inflate the unemployment rate to 19.6 percent, they predicted, while core PCE inflation is projected to average about 0.7 percent over the next six quarters and remain below 2 percent through 2025.

Prakken and Varvares said quick cuts in the Federal Reserve’s policy rate to near zero, massive injections of liquidity and guidance to banks for exceptional forbearance have made it possible for credit markets to continue to operate, even while equity and bond markets have seen sharp declines in prices.

They suggested that an estimated $2.5 trillion in federal rescue packages will help stabilize the economy in the near-term and fuel the rebound.