JAKARTA (TheInsiderStories) – On 28 May, Bureau Economic Analysis reported that first quarter (1Q) GDP of America contracted at a 5.0 percent annual rate, revised down just slightly from the initial estimate of -4.8 percent. More important, detail surrounding the report compelled us to revise down our estimate of 2Q GDP growth from -36.5 percent to -42.7 percent.
Most states began phased reopenings of their economies by mid-May. High-frequency data suggest certain activities curtailed by social distancing — including vehicle sales, restaurant seating, hotel stays, and air travel — had begun recovering by May, several months earlier than we anticipated. In response, we revised up our projection for 3Q growth from 6.1 percent to 9.6 percent.
On balance, we revised down our projection for this year’ GDP growth from -7.3 percent to -8.8 percent, well below the 10 May “Blue Chip” consensus of -5.8 percent. Unemployment claims suggest job losses surpassed 30 million by May, pushing the unemployment rate to 19 percent—higher if not for a sharp decline in the labor force and mis-classification of some furloughed workers as still employed.
We assume new COVID-19 cases dwindle over the summer. However, a vaccine, if developed, may not be widely available until late 2021. Until then, consumers and businesses will remain reticent about resuming activities requiring social proximity especially if, as seems likely, secondary waves of infection develop.
In addition, some businesses will shutter permanently, and other capital will be rendered obsolete in the aftermath of the pandemic. Hence, we expect a grudging recovery, with GDP growing 4.6 percent next year, not surpassing the previous peak until mid-2022, and with the economy not regaining full employment until late 2024.
With slack labor markets and firms competing for reduced business, inflation, measured by the rate of change in the “core” PCE price index, will average less than 1 percent though 2025, well below the Federal Reserve’ 2 percent objective. The near-term outlook for profits is bleak.
BEA’ initial estimate is that corporate profits, as measured in the National Accounts, fell 31 percent (not annualized) in the first quarter, to the lowest level since mid-2011. And, S&P operating earnings fell 49 percent (not annualized) to the lowest level since late 2009.
A phased reopening of the economy is underway, and some activities curtailed by social distancing began recovering in mid-April. Still, details in the most recent GDP report suggest the economy is contracting at a 43 percent annual rate during the second quarter — worse than we previously expected.
Accordingly, we revised down our projection of GDP growth for 2020 to -8.8 percent, below the current consensus. Unemployment claims suggest total job losses topped 30 million by May, pushing the unemployment rate to 19 percent.
An effective vaccine may not be widely available until late 2021. Until then, consumers and businesses will be cautious about resuming pre-COVID-19 activities, especially if secondary waves of infection develop. In addition, some businesses will shutter permanently, and other capital will be rendered obsolete by the pandemic.
Hence, we expect a grudging recovery, with GDP growing 4.6 percent next year, not surpassing the previous peak until mid-2022, and the economy not regaining full employment until late 2024.
by Joel Prakken and Chris Varvares from IHS Markit