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Tuesday, March 31, 2020

The Economic Outlook

by Calculated Risk on 3/31/2020 11:28:00 AM

This is a healthcare crisis, and the economic outlook is based on presumptions about the course of the pandemic.  A key model suggests peak healthcare resource use will be around April 15th, but the peak will not be until May in many areas of the country.   Of course, this requires cooperation of the public.

Before areas can start easing restrictions, the US will need to have sufficient healthcare services and equipment, masks for everyone (it seems likely that it will be recommended that everyone wear a mask), and adequate testing to do surveillance monitoring. Right now, we are well short of all of these requirements, but making progress.   It is possible we could see some restriction easing in June.

Some impacts are already clear: travel is down significantly impacting airlines and hotels, restaurants (except takeout and delivery) and movie theaters are closed.  Many local businesses are closed too - like gyms, barber shops, and flower stands.

Also I expect new and existing home sales will decline sharply, although both residential and commercial construction is ongoing in many places.

Goldman Sachs economists wrote today:

We are making further significant adjustments to our GDP and employment estimates. We now forecast real GDP growth of -9% in Q1 and -34% in Q2 in qoq annualized terms (vs. -6% and -24% previously) and see the unemployment rate rising to 15% by midyear (vs. 9% previously). However, we have upgraded our expectations for the recovery after midyear, with a 19% qoq annualized GDP gain in Q3 (vs. 12% previously). Our estimates imply that a bit more than half of the near-term output decline is made up by year end and that real GDP falls 6.2% in 2020 on an annual-average basis (vs. 3.7% in our previous forecast).
Unlike the great recession, when the situation kept getting worse month after month, the worst economic impact will probably be early, in the months of April and May. Although there is a concern that missed payments will ripple through the system leading to financial problems. This was the purpose of the $2+ Trillion disaster relief package - to help people pay their bills including rent and mortgage (Note: This was NOT a "stimulus" package, this was disaster relief).

My current guess is the economy will start growing - slowly - in June (maybe July).   But growth will likely be slow at first as people put their toes in the water.  I don't expect a "V" shaped recovery unless there is an effective treatment or a vaccine, then growth will pick up quicker.

This is all subject to the course of the pandemic.  Stay healthy!