Economic Projections In a COVID Economy: How Will US GDP Be Affected?

The tragic loss of life attributed to the COVID-19 pandemic will be the darkest legacy of 2020. But beyond the massive scope of human suffering that the virus has brought onto the world there also looms the catastrophic economic fallout. Put simply, this is one of the gravest economic events of the last hundred years. It is an economic disaster of global proportions, gutting major economies on every continent. This includes the previously red-hot economy of the United States.

The severity of the economic impact of the COVID-19 pandemic on the United States is projected to be ugly, according to the International Monetary Fund (IMF). Of the various economists working for major institutions who have projected the loss of real GDP in Fiscal Year 2020 for the country, the IMF has one of the darkest forecasts for the U.S. In their view, real GDP loss will be eight percent on the year. The IMF report projects American economic output within the context of the greater global economic performance. They state, “Global growth is projected at –4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast.” 

To put these figures in context, the Peter G. Peterson Foundation (FGPF), illustrates that among the G7 countries (as well as China), Canada, the U.K., France, and Italy, are all projected to have worse economic declines than the U.S. China is the only country projected to have positive growth, at one percent, and Germany is a virtual tie with the U.S. at -7.8 percent growth. The IMF projects that Japan will have the second-best performance of the G7 countries, with -5.8 percent economic growth.  

Still, they maintain that a definitive forecast is difficult to create, considering the fluid nature of the virus’ spread and subsequent local initiatives to contain it. The major source of economic instability in most developed countries will be the ongoing social distancing efforts, which will continue to hobble steady growth as localities and businesses adjust to the situation on the ground. These measures will continue to undermine service sector performance and complicate industrial activity in all countries that continue to see the virus reemerge throughout the year.

The United States Congressional Budget Office (CBO) projects a considerably less grim impact on the United States’ economy in the wake of COVID-19. The CBO estimates that the overall contraction of real U.S. GDP will be 5.6 percent in FY2020. The office likewise attributes the sharp decline in production to the social distancing measures that were necessary to combat the virus. These measures had a profound negative impact on private businesses, who either scaled down operations or shuttered altogether. According to the report, “Those measures have adversely affected manufacturing as well, by disrupting supply chains and decreasing demand for goods.” It points out that over 20 million non-farm payroll jobs were lost in the U.S. between March and April, the high points of the virus spread and lethality in the country. Therefore, destruction in the U.S. economy was most pronounced in Q2 2020. The CBO projects that Q2 GDP losses amount to roughly -11 percent. The CBO projects that an American economic resurgence will begin in Q3.

The second half of FY2020 is projected to see rapid expansion due to the positive effects of legislation used to mitigate as much economic damage as possible and the expected diminishing of the COVID-19 virus at large. According to the CBO report, not only has legislation like the Paycheck Protection Program (PPP) insulated the economy from even greater deterioration, but it will allow for greater GDP recovery than would have been possible without it.

To quote the CBO at length:

“…the payments and tax credits issued to individuals will boost the overall demand for goods and services by providing resources when many households are experiencing a significant loss in income. In addition, federal assistance for state and local governments will help pay for rising expenditures related to the pandemic as state and local tax revenues fall. Loans and grants will provide liquidity to businesses experiencing financial distress because of social distancing and the sudden drop in economic activity, increasing the likelihood they will survive and preserve jobs for their employees until activity picks back up.”

Through the combination of relaxed social distancing and expected medical progress in treating the virus and containing its spread, the economy is expected to grow at a rapid rate, five percent, in Q3. This is an increase of 21.5 percent at an annualized rate.

The universal consensus on FY2020 GDP is that the Global economy, including that of America, will see negative growth on the year. However the extent of this economic contraction is not universally agreed upon. For example, in July Goldman Sachs projected the U.S. GDP will contract by 4.6 percent, cutting its Q3 GDP projection of 33 percent growth down to 25 percent. Again, the variable of social distancing policies which have fluctuated over the year was a contributing factor for the revision. 

“The healthy rebound in consumer services spending seen since mid-April now appears likely to stall in July and August as authorities impose further restrictions to contain virus spread,” the bank’s economists wrote. But two months later something unexpected was revealed by the firm.

According to a report in CNBC, Goldman Sachs not only revised their Q3 growth projections higher, but expects Q3 to surpass their loftier projections set earlier in the year. This was reported on September 10, after a robust August growth in consumer spending. Resurgence of the virus along with tightened distancing requirements was expected to diminish consumer spending growth, “(b)ut spending instead rose strongly in July, and four high-frequency measures indicate a further 1-2 percent increase in real spending in August,” the bank said. The other contributing factors in this surprise reversal of their projections were better than expected job growth over the summer and positive inventory levels. In total, these factors have resulted in Goldman now estimating Q3 growth to reach 35 percent in the American economy.

While the overall U.S. economy will almost certainly experience negative GDP growth in FY2020, it is unclear how deep and widespread the long-term damage is. It is also uncertain to what extent the GDP will actually contract. Anecdotally the virus appears to be under control in the country, but the future of the pandemic in the short term is unknowable. Will there be another major outbreak? Will the beginning of a new flu season create a perfect storm of chaos in medical facilities and businesses across the country? Or will a major medical breakthrough like a vaccine be announced in the upcoming weeks or before the end of the year? If rapidly deployed, a vaccine could be a game changer for all the numbers projected to this point. Whether it comes sooner, as President Trump has been implying, or early next year, as many in the medical community are suggesting, is the unknowable variable in the country’s future economic output.

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