The severe damage already evident in the U.S. labor market is a clear signal of the recessionary plunge in economic activity. We now forecast real U.S. GDP will contract over −5% over the full year of 2020, with the deepest contraction in the second quarter – an estimated quarterly drop of nearly −30% (annualized). The unemployment rate could temporarily reach close to 20%. The dire U.S. economic outlook has prompted monetary and fiscal policymakers to respond with massive support for struggling sectors and communities to help bridge the gap from hurting to healing, as we discuss in PIMCO’s latest Cyclical Outlook. However, despite all of the policy support, we still see downside risk to the outlook. Government support may not be quick or effective enough to thwart business bankruptcies, while consumer preferences toward savings and consumption could be forever changed.
We knew it would be bad – just not how bad
The health and humanitarian crisis caused by the coronavirus is tragic, and the effect on the economy of containing it is staggering. Recently released official labor market statistics are just starting to show how virus containment measures are halting U.S. activity with stunning scope, scale, and swiftness. Initial jobless claims for the week ended 28 March skyrocketed to 6.6 million individuals, breaking the record set just the previous week (3.3 million) for the highest one-week increase (source: U.S. Department of Labor). The cumulative increase in initial claims in the three weeks through 28 March is now over 6% of the U.S. labor force.
Unsurprisingly, New York and California – two of the earliest states to mandate nonessential business closures – accounted for the largest increase in initial jobless claims over the three-week timeframe. But other states have also reported surges in initial claims, including those whose GDPs heavily rely on manufacturing (Pennsylvania, Michigan, Ohio, Illinois, Indiana) and oil (Texas).
Furthermore, the Bureau of Labor Statistics’ (BLS) March 2020 employment report, although backward-looking, revealed that mass layoffs were happening earlier than implied by the jobless claims data. The March BLS household survey showed that a reduction of three million jobs happened before the 12 March survey week – and that these layoffs were spread across a wider range of industries than just accommodation, food service, and retail. While food service did shed a reported 459,000 jobs in March, health care – which we thought would be relatively resilient – reported a record number of job losses.
Despite the stunning number of job losses, we think they are likely to climb further in the next several weeks as more states close nonessential businesses, and as unemployment insurance claims offices work through a growing backlog. These cumulative job losses could very well reach 20% of the labor market.
Bigger picture and outlook
The speed and magnitude of the U.S. labor market disruption has been sharper than any we’ve seen in recent history, suggesting that the decline in overall activity has also likely been much more severe. Consistent with this, we estimate headline real U.S. GDP growth will contract over −10% in Q1 and almost −30% in Q2 (both rates annualized), while – following our baseline outlook for a U-shaped recovery – full-year 2020 U.S. growth recovers to a roughly −5% contraction.
To put this in context, our forecasted maximum quarterly contraction of almost −30% in Q2 this year is much larger than the reported −8% maximum decline during the global financial crisis in 2008, and similarly, the trough in the year-over-year rate of contraction in 2020 will likely be worse than in 2009. However, the number of quarters the U.S. is expected to remain in contraction is shorter (two quarters in 2020 versus four during the financial crisis) – but what ugly quarters those two could be.
After the pandemic peaks in the U.S. (in May or June, by various experts’ estimates), we expect a recovery in growth in many sectors as businesses reopen, consumers resume spending, and employees return to work. Encouragingly, the increase in the unemployment rate in March was largely driven by temporary layoffs, suggesting that these individuals expect to be hired back after the virus subsides. In the meantime, unemployment insurance, direct payments to households, and small business loan forgiveness programs should provide some support. However, industries more reliant on fixed investment – such as construction and business equipment manufacturing – will likely be slower to recover, as the disruption in lending activity and project planning could curtail business and residential investment for a longer period.
A word about GDP data collection
We likely won’t know the full extent of the economic fallout until June 2021. Relative to the goods sector, official service sector surveys are delayed and less frequent; the Bureau of Economic Analysis (BEA) uses both to estimate GDP. The most timely service sector activity within the BEA’s national income and product accounts (NIPA) comes from the Quarterly Services Survey, which is unavailable for the Advanced GDP release, and in lieu of this data the staff at the BEA estimates services GDP based on a judgmental trend. Even after the first release of this report, low sample sizes (as firms shut down) could bias the data. In all likelihood we won’t know the full extent of the economic damage until the 2020 benchmark revisions are released in mid-2021.
Economic policy support
As we discussed in our 30 March blog post, “Economic Fallout: Here Comes Congress!” the federal government – after passing a record $2.2 trillion relief bill supporting U.S. industries, small businesses, individuals, and state and local governments – is already at work on further stimulus. The next round, or rounds, could see additional support for states and unemployment insurance, as well as more small business and infrastructure spending.
However, despite all the fiscal support helping bridge the gap for many businesses and households, we still see downside risks. Virus-related business closures could last longer than we expect, or near-term government support may not reach businesses and individuals quickly or effectively enough to thwart longer-term economic damage. Also, some segments of the credit market have been left out of government support programs. For example, broad-based bankruptcies across high yield companies, which employ millions of U.S. workers but aren’t receiving any direct government support, could result in a larger economic headwind. Meanwhile, distress in areas like private label residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) as well as leveraged loan markets, which have also been left out, could reduce credit and mortgage availability well after businesses are back up and running.
Ultimately, we think the government and the central bank will do whatever it takes to limit the longer-term damage to the U.S. economy, and that the virus outbreak will eventually subside. However, in the meantime there will be some business bankruptcies and lost GDP. In addition, consumer preferences toward savings and consumption could be forever changed, as the appeal of crowded travel and tourism declines relative to precautionary savings.
This blog was published on 8 April 2020.
Read PIMCO’s latest Cyclical Outlook, “From Hurting to Healing,” for detailed insights into the 2020 outlook for the global economy along with takeaways for investors.
Please see PIMCO’s “Investing in Uncertain Markets” page for our latest insights into market volatility and the implications for the economy and investors.
Tiffany Wilding is a PIMCO economist focusing on North America and a regular contributor to the PIMCO Blog.