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Is US Barreling Toward a W-Shaped Recession?

The sharp upswing in cases and COVID-19-related deaths seen particularly in the South and Southwest states raises the odds that a subsequent pullback in consumer spending and re-imposition of mandatory shutdowns could lead to another contraction in the U.S. economy this fall, Chris Varvares, co-head of U.S. Economics at IHS Markit, said Monday in a new analysis.

“While this is not our base forecast, the alarming rise in cases surely increases the risk the economy could take another turn down,” Varvares said. “It is too early to tell with certainty which path we are on, so we are watching very closely the course of the pandemic and looking for a tipping point where consumers retrench and the pace of renewed business closings accelerates.”

IHS said key scenario assumptions include that the relatively quicker reopening in some states that has already occurred continues and broadens. It also assumes the early opening and upturn in activity drives increased mobility, and follows the conventional wisdom that effective treatments for COVID-19 are not in widespread use until early 2021, while a vaccine is not in widely available until fall 2021. This chronology would then mean a faster reopening of the economy bends the new-case curve upward, rather than downward.

The relatively quicker reopening would then contribute to a “somewhat higher trough in economic activity nationally in the second quarter and a larger pop in activity and stronger growth in the third quarter,” than in the IHS Markit baseline forecast. That outlook has gross domestic product (GDP) declining less in the second quarter–a 35 percent decrease versus a 42 percent falloff–and grows much faster, up 30 percent instead of 13 percent, in the third quarter.

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“The early opening and upturn in activity continues to fuel the increasing pace of new cases and deaths into the fall, when the turn to cooler temperatures exacerbates the spread of COVID-19,” Varvares said. “This occurs until states and local governments increasingly pause or roll back the relaxation of restrictions. Moreover, consumers voluntarily go back into a strategy of ‘shelter in place’ as a result of seeing the rise in cases and deaths around them.”

The report forecasts that the resulting direct decline in consumer spending and knock-on effects would be sharp enough to push the economy back into recession beginning in the fourth quarter, with GDP declining at an 8 percent rate, and contracting at a 12 percent pace in the first quarter of 2021. This scenario has the recovery beginning in the second half of 2021 and pushes GDP to just 1.4 percent below baseline by the end of 2024.

The unemployment rate would rise to 12.8 percent in second quarter of 2020, retreat modestly as people begin to get their jobs back, and then rises again to a peak of 11.6 percent in mid-2021. The rise in employment that accompanies the second recovery brings the unemployment rate back down to 4.2 percent by the fourth quarter of 2024.

“Nevertheless, the unemployment rate averages 8.6 percent through 2026, roughly 2 percentage points higher than in the base case,” the report added.