Person wearing mask in front of boarded-up Disney store. (Photo: David Paul Morris/Bloomberg)

Even before official numbers are released, expectations for the U.S. economy look increasingly grim.

Late last week the Congressional Budget Office (CBO) said second-quarter GDP could contract by more than 28 percent on an annualized basis, or by a “much larger” amount, due to the economic impact of the coronavirus pandemic. Second-quarter unemployment is expected to top 10 percent.

The CBO didn’t look any further into the year, noting that “economic projections, especially for later periods, are highly uncertain at this time,” but it did note that the U.S. jobless rate could be 9 percent by the end of 2021 if there are later outbreaks of the virus after the current outbreak subsides.

A survey of consumers by the Federal Reserve Bank of New York, released Monday, showed a large decline in their personal economic outlook. By the last week of March, more than 40 percent of respondents indicated they expect to be worse off a year from now, four times as many as the last week in February. Respondents also expect their spending a year from now will be about 1 percent less than it is today. 

The negative sentiment began to spike after the first reported coronavirus death in the United States and the World Health Organization’s declaration of a global pandemic. 

Respondents in the Fed survey gave nearly 20 percent odds of losing their job over the next 12 months, up from 13.8 percent in February, and slightly lower odds of finding employment over the next three months — 53 percent, compared with almost 59 percent in February. Earnings growth expectations for the next 12 months also fell, from 2.6 percent in February to 2 percent in March, while odds of a higher jobless rate a year from now rose substantially, from 34.2 percent in February to 50.9 percent in March.

The online survey is based on a rotating panel of approximately 1,300 household heads, who serve on the panel for up to 12 months.

David Kelly, chief global strategist at J.P. Morgan Asset Management, says the U.S. economy has likely descended into a U-shaped recession and should recover “once a safe and effective vaccine is widely distributed.” But that is not expected for another 12 to 18 months.

Once a vaccine is available, there could be a “very rapid surge in economic activity,” says Kelly — one that will likely lead to higher interest rates and rising inflation due to the multitrillion-dollar increase in federal spending. He says there could be another $2 trillion emergency aid package approved by Congress.

Following these initiatives will be “greater austerity in a few years’ time” because of the huge deficits that will result, pushing the federal debt burden to 107 percent of GDP within the next 18 months and to about 120 percent of GDP by 2030, says Kelly. Higher taxes on high-income individuals could also follow.

 

From: ThinkAdvisor