United States Economic Outlook (April 2020)
The economy has taken a marked turn for the worse in the first quarter, as the Covid-19 pandemic has been pervasive throughout all sectors of the economy: ravaging global supply chains and trade; closing businesses; halting tourism; and severely restricting consumers’ discretionary spending. Initial jobless claims surged to 3.3 million in the week ending 21 March—the highest level since October 1982—following the 230,000 reported in the prior week. This was well above the figures recorded during the global financial crisis and virus-related mass layoffs will likely reach unprecedented levels in the weeks to come. As the number of cases continues to increase across the United States, stricter mitigation controls will stifle economic activity. Exacerbating matters, the Saudi Arabia-Russia oil price rout, which sent WTI prices below USD 20 a barrel in recent days, spells trouble for the energy sector. In an extraordinary response to the pandemic, Congress passed a USD 2 trillion coronavirus relief package on 27 March.
The U.S. is now expected to enter a recession, ending the 11-year-record expansion. Consumer spending will contract due to social distancing and rising unemployment, while investment is set to decline. Fiscal and monetary stimulus should provide some relief but will not prevent a recession. An uncontrolled outbreak is the preeminent risk, while hefty corporate debt clouds the outlook. FocusEconomics panelists see GDP contracting 1.8% in 2020, which is down 3.5 percentage points from last month’s forecast, and 3.1% in 2021.
Inflation slipped to 2.3% in February from 2.5% in January. Moving forward, inflation ought to ease further as social distancing and lockdown measures drag on demand for a range of goods and services; the Covid-19 labor market shock drags on wages; and amid ultra-low energy prices. That said, the Fed’s marked loosening will partly offset downside risks. FocusEconomics panelists see inflation averaging 1.2% in 2020, which is down 0.8 percentage points from last month’s estimate, and 1.8% in 2021.
On 15 March, the Fed slashed the target range to its effective floor of 0.00%–0.25%. Since then, the FOMC has ramped up its monetary stimulus measures, expanding its purchases of security assets and making available a number of facilities. The Bank will likely continue interventions at an unparalleled-scale in the wake of the coronavirus crisis.
Congressional Stimulus
After days of heated negotiations, U.S. policymakers passed a historic stimulus package on 27 March amounting to roughly USD 2 trillion (close to 10% of GDP), in efforts to combat the severe economic fallout from the coronavirus pandemic. The major facets of the spending plan are direct transfers and expanded unemployment benefits for American individuals and families, financial assistance to embattled sectors, loans to small businesses, and funding for hospitals. The deal follows the approximately USD 100 billion bill passed in mid-March, which expanded funds for food programs, Medicaid and paid leave, and the early March USD 8 billion package, which included measures for vaccine research and free virus testing. Although the massive fiscal stimulus should provide some relief, it will ultimately not be enough to fully offset widespread damage and may not go far enough for businesses or households when factoring elevated corporate and household debt into the equation. The USD 2 trillion package is broken down into three main components. The first deals with relief for American households and includes direct deposits of USD 1,200 to individuals earning USD 75,000 or below and an additional USD 500 per child and smaller payouts for incomes above that threshold. In addition, the plan also expands jobless benefits, providing 13 extra weeks of unemployment pay, and extends the benefits to gig workers and freelancers. The second major feature of the package deals with economic relief for companies. It provides a USD 500 billion lending program for companies in struggling sectors—with USD 60 billion earmarked for a bailout of commercial airlines, which have reeled in the wake of travel restrictions worldwide—and an additional USD 350 billion in federally-guaranteed loans for small businesses. Lastly, the package allocates USD 100 billion in direct funding for hospitals severely impacted by the virus. Commenting on the effectiveness of the stimulus, Leslie Preston, senior economist at TD Economics, noted that the measures will “do little to boost near-term demand, and as such won’t boost our near-term estimate of GDP growth”. That said, looking further ahead, Preston went on to say that: “it will help ensure that there are more businesses to spend money at once the pandemic subsides. […]
This should help ensure that the U.S. economy is able to bounce back more readily once the worst of the pandemic passes and social distance measures come to an end.” Despite the recent passage of this fiscal package, lawmakers are already expecting to introduce another round of stimulus in the coming weeks or months. Given the looming slump in economic activity, coupled with the size of the fiscal package, the budget deficit will widen markedly this year, with FocusEconomics panelists now projecting a shortfall well above 5% of GDP. Moreover, public debt is expected to reach 115% of GDP. Addressing the implications for the fiscal deficit, James Knightley, chief international economist at ING, noted: “In arguably the most benign case whereby the economy contracts around 3%, that still implies a fiscal deficit of around 12% of GDP. A deeper, more prolonged economic dislocation that requires significantly more fiscal support can quickly get you up to a fiscal deficit well in excess of 20% of GDP. This truly is comparable with wartime. make lowering deficits and debt levels much more challenging relative to post World War 2.”
FocusEconomics Consensus Forecast panelists see the fiscal deficit widening to 7.6% of GDP in 2020, which is down 2.9 percentage points from last month’s estimate, and project a fiscal shortfall of 7.4% in 2021.
