US Daily: A Sudden Stop for the US Economy
- Over the last few days social distancing measures have shut down normal life in much of the US. News reports point to a sudden surge in layoffs and a collapse in spending, both historic in size and speed, as well as shutdowns of many schools, stores, offices, manufacturing plants, and construction sites. These developments argue for a much sharper drop in GDP in Q1 and Q2.
- We expect declines in services consumption, manufacturing activity, and building investment to lower the level of GDP in April by nearly 10%, a drag that we expect to fade only gradually in later months. We now forecast quarter-on-quarter annualized growth rates of -6% in Q1, -24% in Q2, +12% in Q3, and +10% in Q4, leaving full-year growth at -3.8% on an annual average basis and -3.1% on a Q4/Q4 basis.
- These downgrades to our growth forecasts imply a large upward revision to our unemployment rate forecast. Using three approaches—the empirical relationship between GDP and unemployment, the experience of Hurricane Katrina, and a bottom-up analysis of likely job losses by sector and occupation— we estimate a 5.5pp increase in the U3 unemployment rate to a 9% peak in coming quarters. However, we have more confidence that a large increase will be apparent in the U5 rate—which includes individuals who want a job but aren’t actively looking—than in the standard U3 rate.