The Congressional Budget Office said in updated projections that the U.S. economy will contract at an annualized rate of almost 38 percent in the second quarter of this year, part of a precipitous fall in economic activity that has ended the longest expansion since World War II.
Almost 26 million fewer people will be employed in the second quarter, compared to the fourth quarter of 2019, resulting in an unemployment rate of 15 percent and marking the “steepest deterioration in the labor market since the 1930s,” the agency said Tuesday.
While the CBO expects the second quarter to be the worst from an economic perspective, it said the economy will recover only slowly from the coronavirus pandemic and associated disruptions, and the damage will be lasting.
Even though the economy is expected to begin growing again later this year, the CBO said that by the fourth quarter of 2021, real gross domestic product and employment are projected to be lower than they were in the fourth quarter of 2019.
The CBO’s second-quarter economic projection is slightly better than it was in late April, when the agency estimated GDP would fall at an annualized rate of 40 percent.
The agency attributes the economy’s deterioration primarily to a fall in consumer spending, triggered by the closure of businesses and stay-at-home orders beginning in the last two weeks of March. Consumer spending, which accounts for about two-thirds of GDP, dropped by 7.3 percent in March and by an estimated 17 percent in April due to reduced demand and businesses’ limited operations or closing.
Employment has plunged in tandem with the economy’s contraction. Between February and April, the number of people employed fell by 25 million, causing the unemployment rate to surge from 3.5 percent in February to 14.7 percent in April — the highest rate since record-keeping began in 1948.
More than 20 million nonfarm payroll jobs were lost during March and April, with most of those jobs concentrated in industries that rely on person-to-person interactions such as leisure and hospitality, retail, education and health services. The leisure and hospitality sector lost almost half of its jobs, with employment falling from 17 million jobs to 9 million in March and April.
If not for advances in information technology, the economic situation would be even more grim, the CBO said. The report says the fall in economic output “has been partially blunted by past investments in information technologies (such as computers, software, and communications equipment), which have made it possible for a significant portion of economic activity to continue remotely.”
Return of the consumer
The good news is that the CBO expects the economy to begin to recover during the second half of this year, or beginning in July, as concerns about the pandemic diminish and state and local governments ease stay-at-home orders and bans on public gatherings.
“Increases in consumer spending are expected to more than offset further declines in business investment during that period,” the report says, referring to the second half of 2020.
It would not be enough to arrest the first half of the year's decline, however, and the agency forecasts real GDP for the year to drop by 5.6 percent. Next year, though, would see a rebound, with 4.2 percent fourth quarter-over-fourth quarter growth.
On the labor front, the CBO estimates unemployment will rise to 16 percent in the third quarter of 2020, and then begin to fall, hitting 8.6 percent in the fourth quarter of 2021. That’s slightly lower than the agency’s preliminary forecast last month, but still twice as high as the fourth quarter of 2019 before the pandemic began and the highest since late 2011 when the economy was starting to recover from the Great Recession.
Despite the expectation of economic growth resuming later this year, the CBO said the pace of employment growth “is dampened by the prospect that many businesses may not survive the earlier, extended period of revenue loss.” The agency said about 3 million fewer people are expected to be in the labor force by the end of the fourth quarter of next year.
The CBO anticipates the economic downturn will have “severe negative effects — both immediately and potentially over the long term — on many workers, households and communities.”
The job losses have been concentrated in service industries with low average earnings, “so low income households,” who have experienced accelerated economic gains in recent years, “may lose a large fraction of their labor income in the near term,” the report says.
The agency said persistence of high unemployment through 2021 may have a negative effect on job prospects and earnings of younger generations that “will be felt long into the future.” For example, the report says, “college graduates and others who enter the labor market now are expected to have substantially lower earnings initially than those who entered when economic conditions were stronger.”
One bright spot in the agency’s forecast is interest rates, which should hold down borrowing costs on some $2.8 trillion in added deficits over fiscal years 2020 and 2021 due to pandemic relief legislation.
The CBO sees 10-year Treasury notes yielding just 1 percent on average next year even after the recovery is in full swing. Though that’s up slightly from April’s estimate of 0.7 percent, it’s still below the projected rate of inflation.