In my first revised US Economic Forecast at the beginning of April, I was way too optimistic, i.e. not pessimistic enough. Firms such as Morgan Stanley were a lot closer to what was happening and likely going to happen. I just predicted a two-quarter downturn [Recession] with a U-shaped bottoming out beginning in the 3d quarter and a reasonable pick-up in the fourth quarter. What has emerged is much worse than that and I have updated both the actual results and my forecast for the remainder of the year, though everything remains in flux and is highly uncertain, much being dependent on both a vaccine and a treatment for the COV-19 virus and their timing.
At the same time one needs to be careful with the data, particularly with respect to unemployment. So, while 40 million plus have applied for benefits since March only 25 million, still a very big number, are continuing to collect benefits, meaning others have either left the labor force, including retirement, or have found jobs. The latter would be consistent with reports that firms such as Amazon, Walmart and CVS have hired hundreds of thousands of people along with cities and states hiring workers to staff unemployment centers or virus contact trackers. The unemployment numbers I have used in my new revised forecast reflect these developments.
Forecasts by their nature incorporate a lot of assumptions. In this case one of the most important is the shape of the downturn and any recovery. Currently there are three primary cases vying for acceptance with one having two possible variations. The first is a V-shaped or Rocket recovery beginning in June and July that reflects an almost full return to “normal” economic activity in the very near future. Certain members of the Administration cling to this quite unlikely development. The second view which has been promoted by several asset managers is a U-shaped recovery starting with a leveling out of the economy [no further decline and perhaps a slight uptick in growth] in the third quarter. In turn the fourth quarter would show significant growth extending into the first quarter of 2021 along with a widely administered vaccine.
The third option which has been suggested by the Federal Reserve and is incorporated into my forecast is the Nike Swoosh or sharp downturn in the second quarter with a gradual pickup in the third and fourth quarters. The reason I favor this scenario is that people are being more cautious about their lives and well-being in returning to work or venturing forth to stores and travel destinations than desired by many politicians and businesses that appear more interested in seeing the economy opened and returned to normal, which is a true oxymoron, than they are in the health and welfare of constituents, workers, or customers. However, some moderate expansion in economic activity seems to be occurring with appropriate precautions as lockdowns end in several important economic hubs.
In true Adam Smith fashion, the invisible hand of individual actions will in the aggregate drive the economic recovery. Therefore, I expect that a more normal functioning economy awaits a widely administered and effective treatment and vaccine but meanwhile, people will work, travel and shop more only to the extent they feel it can be done safely. On this basis, since most experts think a vaccine solution will not be until the first quarter of next year, my forecast sees only a moderate recovery through year end and we will still not be back to where we were at the end of 2019. Further, while unemployment will better than now it will still be over 10%.
Even this forecast however could turn out to be overly optimistic if there is a modified Swoosh development from a second COV-19 wave or combined second wave with a normal flu cycle in the fourth quarter. I will try to keep everyone apprised as the situation continues to unfold.