U.S. Economy: Gradual recovery in the second half of 2020 after dramatic slump in economic activity

The Covid-19 pandemic and measures to contain it have led to a dramatic slump in economic performance in the United States. After the U.S. economy shrank by 5.0 percent (annualized) in the first quarter of the current year (see the estimate of the Bureau of Economic Analysis published on June 25), the slump in economic performance has probably been much more pronounced in the second quarter with dramatic effects on the job market. Millions of employees have lost their jobs since mid-March; the unemployment rate has increased significantly in the course of these developments. Officially, the rate was at 14.7 percent in April, but the “true” unemployment rate was probably 2 to 4 percentage points higher due to measurement issues. Since April, the unemployment rate has decreased to 13.3 percent in May and to 11.1 percent in June, but again, the “true” unemployment rate is probably still somewhat higher due to the same measurement issues. Although the recovery is now under way, the situation in the economy and on the labor market is still bad. In addition, the number of Covid-19 cases is rising fast again in some states and some lockdown measures were adopted again there. The U.S. economy is likely to recover and grow in the second half of the year; however, the decline in growth from the first half of the year will probably not be offset until 2022. Obviously, such forecasts are associated with a high degree of uncertainty. Besider the risk of a large wave of the pandemic, global tensions could increase – especially between the United States and China.

The U.S. government’s extensive fiscal measures are particularly supportive this year. These measures include direct transfers to low and middle income households, an increase and prolongation of unemployment benefits, and emergency loans for businesses. However, at the time of writing (July 12), it is not clear whether the increase in unemployment benefits will be extended beyond July 31. Monetary policy also supports the economy. The U.S. Federal Reserve cut its key interest rates to almost zero percent in two steps. Extensive asset purchase programs were also decided and various measures were taken to ensure liquidity in the financial system. With the gradual recovery of the US economy, the situation on the labor market will also improve again; however, the unemployment rate is unlikely to drop below 10 percent before 2021. The trade conflict between the United States and China is likely to continue. In the so-called “Phase One” agreement signed in January 2020, a sharp increase in U.S. exports to China was agreed, which is unrealistic given the COVID-19 outbreak and the global economic crisis. The pandemic has also significantly worsened the relationship between the two governments.

All in all, the U.S. economy is expected to shrink by around 7 percent in 2020 in my baseline scenario. In a pessimistic scenario, the decline would be about 9 percent; in the optimistic scenario with a quick recovery, the decline would be 5 percent. In 2021, an economic growth rate of 4 to 5 percent may be expected. Such forecasts or scenarios are of course associated with very high levels of uncertainty.

While I use several models in my forecasts, my published numbers are also strongly influenced by my personal experience and judgment.

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