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IHS Markit Predicts American Economy Will ‘Bounce and Fade’

Get ready for the “bounce and fade” economy until a coronavirus vaccine is available in 2021.

IHS Markit economists framed their forecast that way in a new outlook for U.S. economic growth. Joel Prakken, chief U.S. economist and co-head of U.S. economics, and Chris Varvares, co-head of U.S. economics at IHS Markit, also predicted U.S. gross domestic product (GDP) to pass the pre-pandemic peak in early 2022 and regain full employment in 2023.

“Recent data imply third-quarter real GDP growth near 30 percent, stronger than we anticipated previously,” Prakken said. “This [bounce] encouraged us to upwardly revise our forecast for growth in 2020 from negative 4.8 percent to negative 4 percent. However, after the third quarter we expect GDP growth to fade, as catch-up spending wanes, federal and state and local fiscal support dissipates and stubbornly high Covid-19 infection rates leave states cautious about re-opening their economies and encourage continued caution by consumers and business independent of official containment measures.”

Real GDP contracted 31.7 percent in the second quarter, according to the Bureau of Economic Analysis’ second estimate. This was slightly better than the advance estimate of a 32.9 percent decline, but still the sharpest quarterly decline on record.

IHS said data through July left GDP positioned to grow 29.6 percent in the third quarter, up from 23.4 percent forecast last month.

Prakken said the forecast assumes emergency unemployment benefits of $300 per week are extended from September through December, and another round of checks is sent to households this fall. Congress was back in session on Tuesday and NBC News and other outlets reported that a “skinny bill” compromise was being pushed that included those unemployment benefits, but not much else.

“The recovery will be at renewed risk early in 2021 when this income support expires,” Prakken said. “However, we assume a vaccine becomes available in mid-2021, allowing a more viable recovery to finally then take hold.”

Varvares and Prakken said they expect growth to “fade” to just 2.5 percent in the fourth quarter, “as catch-up spending wanes, fiscal support dissipates, and daily COVID-19 infections remain stubbornly high.”

“Still, for the year, we project GDP growth of negative 4 percent, up from negative 4.8 percent in last month’s forecast,” they said. “Based on guidance from our Life Sciences team, we assume a vaccine is available by mid-2021, allowing the economy to accelerate then. We project growth of 3.5 percent in 2021 and 3.6 percent in 2022.”