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Economic Research: It's Game Over For The Record U.S. Run; The Timing Of A Restart Remains Uncertain

(Editor's Note: On April 7, 2020, we corrected S&P 500 quarterly data in table 4 to reflect the average for the period.)

With now almost 200 million Americans either under shelter-in-place orders or being urged to stay at home in a concerted effort to contain the spread of the new coronavirus, the longest economic expansion in U.S. history has come to an abrupt end.

On March 17, S&P Global Economics said the world's biggest economy had fallen into recession. Based on data and news reported since, we now see the toll on GDP will be far more severe than we once thought--with the contraction showing up in the first-quarter figure and worsening substantially in the April-June period. We forecast a decline in real GDP of 2.1% (annualized) in the first three months of the year and of 12.7% (annualized) in the second quarter, translating to a decline of 3.8% peak to trough (see table 4 for baseline forecasts).

The quarantine of about three-fifths of Americans, either voluntarily or by mandate, has led to a sudden stop in economic activity across the country. That has left the U.S. grappling with possibly the largest economic contraction on record and the highest unemployment rate on record, going back to 1948. (The unemployment rate was 25% in 1933, during the Great Depression, according to the census. Given many unemployed were probably not counted back then, the actual unemployment rate was likely even higher.)

Indeed, looking back at U.S. recessions since 1960, this "sudden stop" recession is shaping up to near the economic losses during the Great Recession, according to our estimates, but over a much shorter time frame. If this recession worsens, the economic damage would far exceed that of the Great Recession.

Table 1

U.S. Recessions In History
Peak Trough Length (months) Previous expansion GDP decline (%) Stock market decline* Unemployment rate increase (percentage points) Federal funds rate decline§
Apr-60 Feb-61 10 24 (1.3) 1.5 (1.30)
Dec-69 Nov-70 11 106 (0.7) (32.1) 2.4 (3.37)
Nov-73 Mar-75 16 36 (3.1) (41.2) 3.8 (4.49)
Jan-80 Jul-80 6 58 (2.2) (13.4) 1.5 (4.79)
Jul-81 Nov-82 16 12 (2.6) (15.5) 3.6 (9.84)
Jul-90 Mar-91 8 92 (1.4) (15.6) 1.3 (2.03)
Mar-01 Nov-01 8 120 (0.4) (20.3) 1.3 (3.89)
Dec-07 Jun-09 18 73 (4.0) (41.1) 4.5 (4.03)
Baseline
Mar-20 May-20 3 129 (3.8) (34.0) 9.0 (2.25)
Deep recession
Mar-20 Sep-20 7 129 (5.9) (41.0) 12.0 (2.25)
Past cycle average (1960-2010) 11.6 65.1 (2.0) (25.6) 2.5 (4.22)
*S&P 500 reflects percentage change from the peak before the recession till the trough during the recession. §Discount rate in 1960 and 1970 recessions. Sources: NBER, BEA, BLS, Federal Reserve, and S&P Global estimates for 2020 recession.

Beyond the demand shock from Americans' "social distancing," other developments are also dragging economic growth, including Boeing's suspension of 737 Max production over safety concerns and the oil price plunge amid a standoff between Saudi Arabia and Russia.

The government's latest $1.8 trillion stimulus measure, the biggest economic relief package in history, won't stop the ongoing recession, which we expect will end in the second quarter, assuming the virus is contained midyear. But we believe it will reduce the risk of an even deeper recession and support a post-virus rebound in activity as the government's bridge payments help tide over people and firms until it is safe to start back up again. Still, those payments will likely last only a few months, while the longevity of the virus remains uncertain.

Even with the help from Uncle Sam, the second-half recovery won't likely be enough to get the economy back to even for the year. We now expect a full-year contraction of 1.3% before the economy regains its expansionary path, with 3.2% growth next year and 2.5% in 2022. The U.S. economic pie in 2020 will be $240 billion smaller than in 2019. It will also be $360 billion smaller than what S&P Global Economics expected for 2020, based on our December pre-virus U.S. forecast.

Table 2

S&P Global Economic Overview: March 2020 (Baseline)
Key indicator 2019 2020f 2021f 2022f 2023f
Real GDP (year % change) 2.3 (1.3) 3.2 2.5 2.0
Real GDP (Q4/Q4 % change) 2.3 (1.2) 3.5 2.1 1.8
Real consumer spending (year % change) 2.6 (1.4) 2.6 2.8 2.2
Real equipment investment (year % change) 1.3 (6.3) 6.3 5.6 4.3
Real nonresidential structures investment (year % change) (4.3) (11.8) 4.9 4.7 3.1
Real residential investment (year % change) (1.5) 1.9 2.7 3.0 3.2
Core CPI (year % change) 2.2 0.9 1.9 2.8 2.3
Unemployment rate (%) 3.7 7.1 5.7 4.7 3.8
Housing starts (annual total in mil.) 1.3 1.3 1.3 1.3 1.3
S&P Case-Shiller Home Price Index (Dec. to Dec. % change) 3.5 3.5 2.3 2.3 3.3
Light vehicle sales (annual total in mil.) 17.0 13.4 15.6 16.1 16.0
Federal Reserve's fed funds policy target rate range (year-end %) 1.5-1.75 0-0.25 0-0.25 0.5-0.75 1.25-1.5
Notes: All percentages are annual average percentage changes, except for real GDP Q4/Q4. Core CPI is Consumer Price Index excluding energy and food components. Forecasts were generated before the third estimate of Q4 2019 GDP was published by the BEA. See table 2 for extended forecast. f--forecast. Sources: Oxford Economics and S&P Global Economics forecasts.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Unemployment Surges

We think headline unemployment will likely jump to 10.1% in the second quarter, with more than 10 million Americans losing jobs. That is more than the 8.7 million workers who lost their jobs during the Great Recession. Furthermore, we expect a monthly unemployment rate in the second quarter will easily reach 13% (likely in May), which would be the highest unemployment rate at any time going back to 1948. Already, one in every five Americans has reported having their jobs cut or hours reduced since the beginning of the crisis--with women and low-income households suffering most, according to a survey by NPR/PBS NewsHour/Marist.

The impact from measures to contain the coronavirus left a huge number of workers without paychecks, and a big chunk applied for unemployment insurance. Initial jobless claims surged to 3.3 million for the week of March 21. Unfortunately, again thanks to the coronavirus, this is another record, over 4x higher than the previous record high of 695,000 set in the 1982 recession. These initial claims numbers are also nearly 5x higher than the initial jobless claims peak of 665,000 during the Great Recession, when 8.7 million jobs were lost. Most state-level readings earlier indicated their own record highs, with California posting over 1 million claims and the unemployment application sites crashing in both New Jersey and New York due to the sheer volume of traffic.

The results only confirm what we already knew--that the U.S. economy (and much of the world) has been gravely sickened by the coronavirus. These terrible figures will most likely be followed by other extreme post-outbreak reports, with the Bureau of Labor Statistics employment report likely posting 125,000 jobs lost in March. Whatever that number may be, it's almost certain that it will only get worse over the following months.

Displaced U.S. workers may find some comfort that Uncle Sam's economic relief package, which will likely make it into law, includes a 13-week extension to unemployment benefits and extra unemployment benefits from the federal government. Unemployment benefits reportedly have been broadened to include freelancers, furloughed employees, and gig workers. The package also includes bridge payments to individuals and firms.

This all comes amid a massive pullback in discretionary spending, which looks set to lead to the sharpest quarterly contraction in consumer outlays on record for April-June. In addition, we expect business investment and trade to shrink by the most since the Great Financial Crisis. Lost revenue from the pandemic has caused steep cuts in business investment, exacerbated by reductions in energy investments on the back of the huge drop in oil prices to well below break-even prices.

And while we continue to forecast a U-shaped recovery in the second half, the path and severity of the coronavirus pandemic will dictate when the rebound will start. Productivity growth had already been sluggish for at least a decade, at just 1.0%. Lost productivity and growth from millions of workers either sequestered or unemployed will exacerbate this trend.

Table 3

GDP And Key Components
(Year-on-year % change, real terms) 2019 --2020f-- 2021f
Q4 Q1 Q2 Q3 Q4 Q1
GDP 2.33 1.01 (2.84) (2.02) (1.19) 0.35
Consumer spending 2.63 1.83 (2.80) (2.74) (1.85) (0.51)
Business fixed investment (0.34) (2.04) (6.82) (5.51) (2.13) 1.00
f--Forecast.

Consumer Spending Dries Up

Amid a tight jobs market preceding the coronavirus shutdown, consumer spending (which accounts for about 70% of U.S. economic activity) was the driving force behind the historic expansion--more than making up for a manufacturing slump as the White House engaged in trade disputes on a number of fronts. That support is now gone.

While President Donald Trump has at times signaled that he'd like to see many of the current "social distancing" restrictions eased, health experts and top officials continue to ask for adherence to these guidelines. A day after U.S. Surgeon General Dr. Jerome Adams said that federal guidelines were working but advised that "we really need more people to take this seriously," top Pentagon officials warned on March 24 that the outbreak will last in the U.S. for at least the next three months. With that said, it's hard to imagine people will be venturing out into crowded public spaces anytime soon.

Even after the Centers for Disease Control and Prevention eventually lift restrictions, we suspect that people's continued reluctance to enter public spaces may slow the recovery. We also suspect that spending habits may shift, at least for the time being, to activities friendlier to social distancing, such as online shopping instead of the mall and movies at home rather than a night at the theater.

Before the outbreak spread widely in the U.S., American shoppers had already cut their spending, as shown by the decline in February retail sales. While an overall drop in gasoline prices partly explains this decline, there was also a bigger pullback in spending across the board. Unsurprisingly, online retailers were one of the few gainers, with sales rising 0.7%. With social distancing in full swing, online shopping will likely be the only game in town in March.

Social distancing will also likely weigh dramatically on consumer spending for the full year, with services suffering the biggest hit. Current containment and mitigation efforts will directly put 14% of spending at risk. It seems likely that public transportation, recreation, and leisure activity (tourism, restaurants, and bars) will suffer at least through most of May.

Consumption of durable and nondurable goods is also likely to decline; households have front-loaded on many essentials. On the flip side, demand for food delivery has picked up, and Amazon announced it plans to hire an additional 100,000 employees in the U.S. as millions of people turn to online shopping. We expect nondiscretionary services such as housing, utilities, and medical expenses to remain stable.

Overall, we see consumer spending trimming 2.0 percentage points from first-quarter GDP, with sharp declines in March spending wiping out gains from earlier in the quarter. In the second quarter, consumer spending is likely to fall much further, down a whopping 13.2%, with more households quarantined or without paychecks to spend. Social distancing is another big reason why they aren't spending. News of lost jobs and rising unemployed workers, possibly themselves or someone they know, also means they will keep their wallets shut--all to explain why 70% of respondents from 451 Research's macroeconomic monthly consumer spending survey in March see the economy worsening over the next 90 days, a 46-point jump.

Chart 1

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Chart 2

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We assume June will bring a modest pickup in spending, though tempered by the lingering effects of the damage to confidence. All told, we expect consumer spending to fall 1.4% for the year. And because some of this activity can't be made up later, we estimate a permanent loss of $145 billion (inflation adjusted) from just the consumer channel by 2023.

Closing Shop

As supply-chain disruptions continue to weigh on U.S. growth, the hit to business investment could linger. And with the sharp decline in oil prices--due to lost demand as well as the Saudi Arabia-Russia dispute--energy sector spending looks unlikely to rebound anytime soon. Supporting manufacturing and service sector investments will also suffer.

Finally, the suspension of Boeing 737 Max production and exports looks unlikely to be resolved until at least July, further complicating the picture. We expect sharp declines for both business equipment investment and structures in the first half of the year. Business equipment investment will likely drop by more than 21% in the second quarter after a 6.5% decline in the first. Nonresidential construction will tumble by more than 31% in the second and 10.5% in the third as the oil price war keeps energy companies' pocketbooks shut.

Chart 3

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Chart 4

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Meanwhile, international economic activity will be sluggish at best. The rapid spread of the coronavirus brings unprecedented challenges for global supply chains, with U.S. seaborne imports down 15.0% year over year in the first two weeks of March, according to Panjiva. Still, at this point, U.S. net exports may be largely neutral for growth, because while exports in goods and services (13% of GDP) will be down, imports (17% of GDP) will also drop. This comes as the New York Federal Reserve's Empire State Manufacturing Index dropped a record 34.4 points, to -21.5, in March. And business sentiment plunged with the Institute for Supply Management's manufacturing sentiment index back below 50, indicating contraction for the first time since the economic expansion started in July 2009.

Housing starts, which were running at a fairly fast clip December through February, are bound to slow this spring, given worker supply disruptions and diminished demand as fearful households steer clear of the market, at least for now. That leaves residential investment falling by 12% in the second quarter, wiping out the 9% gain seen in the first quarter, and after the sector saw quarterly declines from first quarter 2018 to second quarter 2019. We see housing starts slipping to 1.2 million in the second quarter, before slowly climbing back to 1.3 million by year-end.

The Fed And Uncle Sam Save The Day

On the bright side, the Fed has announced a slew of emergency measures to inject liquidity into the financial system and ensure the orderly functioning of markets, in addition to slashing benchmark borrowing costs to effectively zero.

The central bank has pledged to use "its full range of tools to support the economy," announcing unlimited quantitative easing by permitting unlimited buying of Treasury bonds and mortgage-backed securities. The Fed is also setting up two new lending facilities--primary- and secondary-market corporate credit facilities to support credit to large employers for new bond and loan issuance and provide liquidity for outstanding corporate bonds, respectively. It is also expanding its money market lending facility and opening its commercial paper funding facility to high-quality municipal debt.

On the fiscal side, lawmakers' nearly $2 trillion stimulus package would put money directly in the pockets of most Americans, significantly expand unemployment benefits, and make available $367 billion for small businesses to keep paying workers forced to stay home. It also provides subsidized loans to larger industries, significant help to hospitals, and $150 billion to state and local governments.

While all of this will likely help, our assessment of the U.S. economy forecasts a sea of red across most private sectors. That $2 trillion check from Uncle Sam will not fully offset the drag on second-quarter economic activity. Instead, it will make an ugly outcome just a little less so. How much GDP contracts really hinges on when and how strongly consumer demand comes back to life, which, in turn, depends on the duration of containment and mitigation policies.

Table 4

S&P Global Economic Outlook: March 2020 (Baseline)
2019 --2020--
Key indicator Q4 Q1e Q2e Q3e Q4e 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e
(Percentage change)
Real GDP 2.1 (2.1) (12.7) 5.6 5.6 2.9 1.6 2.4 2.9 2.3 (1.3) 3.2 2.5 2.0
Real GDP (4Q/4Q) (in real terms) 1.9 2.0 2.8 2.5 2.3 (1.2) 3.5 2.1 1.8
Domestic demand 0.5 (1.1) (12.8) 5.7 5.4 3.6 1.9 2.6 3.1 2.4 (1.3) 3.1 2.6 2.1
Consumer spending 1.7 (2.0) (13.2) 3.4 5.5 3.7 2.7 2.6 3.0 2.6 (1.4) 2.6 2.8 2.2
Equipment investment (4.4) (6.5) (21.4) 2.1 12.3 3.2 (1.3) 4.7 6.8 1.3 (6.3) 6.3 5.6 4.3
Intellectual property investment 4.0 (1.2) (8.0) 12.8 9.6 3.6 7.9 3.6 7.4 7.6 1.8 8.0 5.6 4.4
Nonresidential construction (8.1) (6.5) (31.2) (10.0) 18.0 (3.1) (5.0) 4.7 4.1 (4.3) (11.8) 4.9 4.7 3.1
Residential construction 6.1 9.0 (12.0) 4.0 2.7 10.2 6.5 3.5 (1.5) (1.5) 1.9 2.7 3.0 3.2
Federal government purchases 3.8 3.4 7.2 3.8 5.0 (0.1) 0.4 0.8 2.9 3.5 4.6 1.8 (0.4) (0.4)
State and local government purchases 1.9 0.8 0.5 1.1 1.2 3.2 2.6 0.6 1.0 1.6 1.1 0.8 0.8 0.8
Exports of goods and services 2.1 (9.0) (7.0) 0.6 5.1 0.5 (0.0) 3.5 3.0 (0.0) (3.1) 2.9 3.3 2.8
Imports of goods and services (8.6) (0.1) (9.0) 2.9 4.0 5.3 2.0 4.7 4.4 1.0 (2.6) 2.9 4.4 3.8
CPI 2.0 1.9 0.1 (0.3) (0.4) 0.1 1.3 2.1 2.4 1.8 0.3 2.5 2.9 2.2
Core CPI 2.3 2.0 0.9 0.4 0.3 1.8 2.2 1.8 2.1 2.2 0.9 1.9 2.8 2.3
Nonfarm unit labor costs 1.5 (4.1) (21.4) 17.3 1.9 2.2 1.2 2.6 2.2 2.3 (3.2) 2.9 3.8 3.9
Productivity trend ($ per employee, 2009$) 0.1 4.5 12.7 (9.3) 2.6 1.2 (0.1) 1.1 1.3 1.2 2.4 0.9 0.6 0.4
Levels
Unemployment rate (%) 3.5 4.9 10.1 6.9 6.5 5.3 4.9 4.3 3.9 3.7 7.1 5.7 4.7 3.8
Payroll employment (mil.) 151.8 149.9 141.1 146.3 147.3 141.8 144.3 146.6 148.9 150.9 146.1 149.2 151.8 154.2
Federal funds rate (%) 1.7 1.1 0.1 0.1 0.1 0.1 0.4 1.0 1.8 2.2 0.4 0.1 0.3 1.1
10-year T-note yield (%) 1.8 1.5 0.8 1.2 1.3 2.1 1.8 2.3 2.9 2.1 1.2 1.4 1.6 1.9
Mortgage rate (30-year conventional, %) 3.7 3.8 3.1 3.3 3.3 3.9 3.6 4.0 4.5 3.9 3.4 3.4 3.7 3.7
3-month T-bill rate (%) 1.6 0.9 0.0 0.2 0.2 0.1 0.3 0.9 2.0 2.1 0.3 0.2 0.4 1.1
S&P 500 Index 3,086 3,029.16 2,412.2 2,583.48 2,712.0 2,061.2 2,092.4 2,448.2 2,744.7 2,912.5 2,521.2 3,034.0 3,315.3 3,397.5
S&P 500 operating earnings (bil. $) 1,948.17 1,895.72 1,760.29 1,726.18 1,747.81 1,563.65 1,457.14 1,645.68 1,834.84 1,950.46 1,782.50 2,161.75 2,417.84 2,446.72
Current account (bil. $) (438.1) (463.6) (374.8) (415.0) (420.2) (407.8) (428.3) (439.6) (491.0) (495.0) (418.4) (462.6) (534.4) (572.5)
Exchange rate (index March 1973=100) 92.2 92.8 96.2 94.7 94.0 91.0 91.6 91.1 89.0 92.0 94.4 92.4 90.2 88.9
Crude oil ($/bbl, WTI) 56.9 48.8 36.4 36.8 42.2 48.7 43.2 50.9 64.8 57.0 41.0 48.2 55.1 56.0
Saving rate (%) 7.7 7.8 17.0 9.5 9.2 7.6 6.8 7.0 7.7 7.9 10.9 8.4 7.9 8.2
Housing starts (mil.) 1.4 1.4 1.2 1.2 1.3 1.1 1.2 1.2 1.2 1.3 1.3 1.3 1.3 1.3
Unit sales of light vehicles (mil.) 16.9 14.8 10.6 13.2 15.0 17.5 17.6 17.2 17.3 17.0 13.4 15.6 16.1 16.0
Federal surplus (FY unified, bil. $) (237.3) (356.6) (493.6) (1,093.5) (746.7) (439.1) (585.6) (665.8) (779.0) (984.4) (2,690.5) (1,871.3) (1,505.2) (1,496.7)
Federal surplus (FY. unified, bil. $) % of GDP (2.6) (2.9) (3.5) (3.9) (4.5) (10.7) (10.3) (6.5) (6.2)
Notes: (1) Quarterly percentage change represents annualized change over the period, except for CPI and core CPI. Quarterly CPI and core CPI represent year-over-year change during the quarter. Annual percentage change represents average annual growth rate from a year ago, except when noted otherwise. (2) Quarterly levels represent average during the quarter; annual levels represent average levels during the year. (3) Quarterly levels of housing starts and unit sales of light vehicles are in annualized millions. (4) Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. (5) Domestic Demand measured as gross domestic purchases is the market value of goods and services purchased by U.S. residents, regardless of where those goods and services were produced. It is GDP minus net exports of goods and services. (6) Forecasts were generated before the third estimate of Q4 2019 GDP was published by the BEA. e--Estimate.

Upside And Downside Scenarios

Each quarter, S&P Global economists project two scenarios in addition to their base case, one with faster growth than the baseline and one with slower. Scenarios are based on ordinary risks to baseline growth, not extraordinary risks.

Chart 5

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Upside: come together!

In the upside scenario, people agree to social distancing rules as COVID-19 runs its course, and the U.S. government and Federal Reserve come together to offer support to households and businesses, bridging the gap caused by the shutdown. Led by New York and California, the rest of America shuts down early to successfully contain the virus, leaving the U.S. clear of further outbreaks in May. Americans who were stuck at home in the spring come out to enjoy the sun with no fear of relapse heading into the third quarter.

The U.S. economy would experience a V-shaped recovery (compared with a U-shaped recovery in the baseline) in the second half of the year and one more year of solid above-trend growth, as well as significantly higher above-average GDP in 2020 than in our baseline case.

While the world bounces back from the global recession, trade tensions would ease, at least over the near term, between the U.S. and China. After stumbling in 2018 and 2019 and a COVID-19-related hit in the second quarter, housing would rebound in the second half, with real residential investment climbing 3.3% in 2020, as opposed to a lackluster 1.9% increase in the baseline. As U.S. economic activity picks up, the Fed would have the room to raise rates gradually, by an additional 25 basis points next year, followed by a few more hikes in 2022. The global recovery would help business sentiment rebound across both the industrial and service sectors, with the S&P 500 reaching a 3150 average in 2021, much higher than 3034 in our baseline.

Higher-than-potential growth would require businesses to continue looking to hire more folks, thus keeping the unemployment rate lower in this scenario, rising to 5.1% in 2020(compared with 7.1% in the baseline) and then falling to 3.9% in 2021 (lower than 5.7% in the baseline scenario). Continued strength in the labor market would let workers enjoy healthier wage gains throughout next year. Together with the income effect, wealth from a rebound in stock market gains in 2021--helped by a cooling of trade tensions--would lead to higher consumer sentiment.

All of this would be sufficient for consumer spending growth to pick up to 3.2% in 2021 and for the virus-driven slowdown in consumer spending to still be up 0.7% in 2020. Both would be vast improvements over the negative 1.4% and positive 2.6% for 2020 and 2021, respectively, in the baseline scenario. Strength in the labor market would help push up household formation rates, providing a tailwind to the housing market (compared with the baseline).

In this optimistic scenario, after a flat rate in 2020, real GDP growth would jump to 3.3% next year, above -1.3% and 3.2%, respectively, in the baseline.

Table 5

S&P Global Economic Outlook: March 2020 (Upside)
Key indicator 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e
Percentage change
Real GDP (in real terms) 2.9 1.6 2.4 2.9 2.3 0.2 3.3 1.6 1.7
Domestic demand 3.6 1.9 2.6 3.1 2.4 0.2 3.2 1.6 1.7
Consumer spending 3.7 2.7 2.6 3.0 2.6 0.7 3.4 2.1 1.9
Equipment investment 3.2 (1.3) 4.7 6.8 1.3 (4.2) 4.0 2.4 2.6
Intellectual property investment 3.6 7.9 3.6 7.4 7.6 2.8 3.5 2.4 2.4
Nonresidential construction (3.1) (5.0) 4.7 4.1 (4.3) (9.6) 2.9 2.4 2.5
Residential construction 10.2 6.5 3.5 (1.5) (1.5) 3.3 2.4 2.0 2.1
Federal government purchases (0.1) 0.4 0.8 2.9 3.5 2.7 (0.8) (1.1) (0.4)
State and local government purchases 3.2 2.6 0.6 1.0 1.6 0.8 0.6 0.8 0.8
Exports of goods and services 0.5 (0.0) 3.5 3.0 (0.0) (3.0) 5.2 3.3 3.2
Imports of goods and services 5.3 2.0 4.7 4.4 1.0 (2.5) 4.4 3.2 3.2
CPI 0.1 1.3 2.1 2.4 1.8 1.2 2.0 2.0 2.0
Core CPI 1.8 2.2 1.8 2.1 2.2 1.7 2.0 2.0 2.0
Nonfarm unit labor costs 2.2 1.2 2.6 2.2 2.3 (1.1) 2.5 2.2 1.4
Productivity trend ($ per employee, 2009$) 1.2 (0.1) 1.1 1.3 1.2 1.4 1.4 1.2 1.5
Levels
Unemployment rate (%) 5.3 4.9 4.3 3.9 3.7 5.1 3.9 3.8 4.0
Payroll employment (mil.) 141.8 144.3 146.6 148.9 150.9 149.5 152.0 152.9 153.6
Federal funds rate (%) 0.1 0.4 1.0 1.8 2.2 0.8 0.3 1.0 1.4
10-year T-note yield (%) 2.1 1.8 2.3 2.9 2.1 1.2 1.4 1.9 2.2
Mortgage rate (30-year conventional, %) 3.9 3.6 4.0 4.5 3.9 3.7 3.9 3.6 4.0
3-month T-bill rate (%) 0.1 0.3 0.9 2.0 2.1 0.7 0.3 1.0 1.5
S&P 500 Index 2,061.2 2,092.4 2,448.2 2,744.7 2,912.5 2,709.2 3,150.0 3,425.0 3,562.5
S&P 500 operating earnings (bil. $) 1,563.6 1,457.1 1,645.7 1,834.8 1,950.5 1,687.2 2,342.7 2,261.7 2,497.7
Current account (bil. $) (407.8) (428.3) (439.6) (491.0) (495.0) (497.1) (518.8) (550.7) (582.5)
Exchange rate (index March 1973=100) 91.0 91.6 91.1 89.0 92.0 97.7 96.8 93.7 90.8
Crude oil ($/bbl, WTI) 48.7 43.2 50.9 64.8 57.0 36.1 42.9 51.5 56.9
Saving rate (%) 7.6 6.8 7.0 7.7 7.9 9.2 7.4 6.8 6.5
Housing starts (mil.) 1.1 1.2 1.2 1.2 1.3 1.3 1.4 1.4 1.3
Unit sales of light vehicles (mil.) 17.5 17.6 17.2 17.3 17.0 13.9 16.8 16.5 16.0
Federal surplus (FY unified, bil. $) (439.1) (585.6) (665.8) (779.0) (984.4) (1,501.0) (1,348.8) (1,211.2) (1,245.8)
Notes: (1) Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. (2) Forecasts were generated before the third estimate of Q4 2019 GDP was published by the BEA. e--Estimate.
Downside: down for the count

In our most likely downside scenario, the fear of the virus shuts down normal life in much of the U.S. harder and longer than in our baseline.

In this scenario, the bottoming-out is wider in 2020 and includes the third quarter (compared with the second quarter in our baseline). GDP would decline by more than twice as much as in our baseline as the economy contracts (on an annual average basis) by 3.2% in 2020 (compared with -1.3% in our baseline). At its worst, the third quarter would be 5.25% below the third quarter of last year (in our baseline, the second quarter is the worst--down 2.84% from last year).

Consumer spending would contract 4% in 2020, compared with 1.4% in our baseline. In the second quarter, consumer spending would be down 24% on a quarterly sequential basis and 6.5% year over year.

The labor market would be slower to recover, and the fiscal stimulus would not be enough to offset entrenchment based on virus fears. Layoffs would surge higher in the second quarter than in our baseline assumption, with the unemployment rate peaking in May, at 15%. The key difference in this scenario, however, is that the recovery path is slower than in the baseline, with unemployment still near 8% by year-end (compared with 6.5% in the baseline). The unemployment rate would not fall to 6.5% before the second half of 2022.

Both business and residential investments would be hit hard, with business fixed investment declining 30% in the second quarter on a quarterly annualized basis. It would decline again in the third quarter, for six consecutive quarters of decline. In such a scenario, stock markets would struggle to move up, and just as in our baseline case, central banks would be on an effective zero bound for the next few years.

Table 6

S&P Global Economic Outlook: March 2020 (Downside)
Key indicator 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e
(Percentage change)
Real GDP (in real terms) 2.9 1.6 2.4 2.9 2.3 (3.2) 4.0 3.3 2.8
Domestic demand 3.6 1.9 2.6 3.1 2.4 (4.1) 3.1 3.3 2.8
Consumer spending 3.7 2.7 2.6 3.0 2.6 (4.1) 2.7 3.2 3.0
Equipment investment 3.2 (1.3) 4.7 6.8 1.3 (11.1) 3.9 9.1 6.0
Intellectual property investment 3.6 7.9 3.6 7.4 7.6 (3.2) 3.4 7.7 5.1
Nonresidential construction (3.1) (5.0) 4.7 4.1 (4.3) (16.7) 2.8 9.8 6.2
Residential construction 10.2 6.5 3.5 (1.5) (1.5) 4.2 2.0 3.1 2.8
Federal government purchases (0.1) 0.4 0.8 2.9 3.5 2.7 (0.8) (1.1) (0.4)
State and local government purchases 3.2 2.6 0.6 1.0 1.6 0.8 0.6 0.8 0.8
Exports of goods and services 0.5 (0.0) 3.5 3.0 (0.0) (3.6) 1.8 2.1 2.9
Imports of goods and services 5.3 2.0 4.7 4.4 1.0 (9.8) (5.2) 2.0 3.3
CPI 0.1 1.3 2.1 2.4 1.8 0.6 0.9 2.2 2.6
Core CPI 1.8 2.2 1.8 2.1 2.2 1.1 1.1 2.0 2.3
Nonfarm unit labor costs 2.2 1.2 2.6 2.2 2.3 (3.4) 1.5 2.7 2.9
Productivity trend ($ per employee, 2009$) 1.2 (0.1) 1.1 1.3 1.2 1.3 1.5 1.3 1.1
Levels
Unemployment rate (%) 5.3 4.9 4.3 3.9 3.7 8.2 6.7 5.2 3.9
Payroll employment (mil.) 141.8 144.3 146.6 148.9 150.9 144.8 148.1 151.0 153.4
Federal funds rate (%) 0.1 0.4 1.0 1.8 2.2 0.5 0.1 0.1 0.5
10-year T-note yield (%) 2.1 1.8 2.3 2.9 2.1 1.1 1.4 1.6 1.7
Mortgage rate (30-year conventional, %) 3.9 3.6 4.0 4.5 3.9 3.5 3.5 3.5 3.8
3-month T-bill rate (%) 0.1 0.3 0.9 2.0 2.1 0.4 0.2 0.2 0.6
S&P 500 Index 1,920.5 1,943.8 2,291.0 2,553.0 2,656.4 2,220.7 2,234.7 2,559.1 2,735.4
S&P 500 operating earnings (bil. $) 1,563.6 1,457.1 1,645.7 1,834.8 1,950.5 1,459.9 2,021.9 2,221.9 2,556.6
Current account (bil. $) (407.8) (428.3) (439.6) (491.0) (495.0) (278.6) (113.5) (126.6) (147.7)
Exchange rate (index March 1973=100) 91.0 91.6 91.1 89.0 92.0 97.6 97.3 93.2 90.5
Crude oil ($/bbl, WTI) 48.7 43.2 50.9 64.8 57.0 35.4 36.5 46.0 55.2
Saving rate (%) 7.6 6.8 7.0 7.7 7.9 13.6 12.8 12.1 11.5
Housing starts (mil.) 1.1 1.2 1.2 1.2 1.3 1.2 1.3 1.3 1.3
Unit sales of light vehicles (mil.) 17.5 17.6 17.2 17.3 17.0 11.6 14.4 15.0 15.6
Federal surplus (FY unified, bil. $) (439.1) (585.6) (665.8) (779.0) (984.4) (2,889.2) (2,112.5) (1,778.0) (1,719.4)
Notes: (1) Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. (2) Forecasts were generated before the third estimate of Q4 2019 GDP was published by the BEA. e--Estimate.

Writer: Joe Maguire

This report does not constitute a rating action.

U.S. Chief Economist:Beth Ann Bovino, New York (1) 212-438-1652;
bethann.bovino@spglobal.com
U.S. Senior Economist:Satyam Panday, New York + 1 (212) 438 6009;
satyam.panday@spglobal.com

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