Finally, both exports and imports of goods have been hit by the pandemic, as should be made clear by the advance economic indicators report, due out on Friday. However, trade may well prove to be a drag on the U.S. economy throughout this recession since travel and transport services, in which the U.S. traditionally runs a surplus, will likely remain moribund until a vaccine is distributed globally. The facts that the U.S. recession is being accompanied by a global recession and that “safe haven” status has boosted an already over-valued dollar by another 3.5% year-to-date, should further squash trade as a source of demand growth.
So how does this all add up? While acknowledging the heightened uncertainty of any projection at this time, one possible path could have real GDP fall by roughly 35% annualized in the second quarter following a nearly 5% decline in the first, then bounce by about 15% in the third quarter and climb 5% in each of the next two quarters before rising by 8% in the second quarter of 2021 and roughly 10% annualized in the subsequent two quarters and at a similar pace in early 2022.
A Pattern For Employment
In this scenario, and looking at the numbers in absolute rather than annualized terms, real GDP falls by 11.4% between the fourth quarter of 2019 and the second quarter of 2020. This would far eclipse the 4% drop in real GDP seen in the Great Financial Crisis. Even with this, the employment collapse is likely to be greater.
The May employment report, due out on Friday, June 5th, could show a further roughly 3 million job loss on top of the 21 million jobs shed between February and April. If this transpires, and May proves to be the low point for employment in this recession, then the peak-to-trough job loss would be roughly 16%.
Thereafter, however, job growth could turn positive.
The monthly employment report always refers to the week that contains the 12th of the month and, in early May, many businesses were just beginning to reopen. This, on its own, would trigger an employment bounce in June. However, these gains could be suppressed by state and local layoffs and the expiration of incentives for small businesses to hang onto workers even as enhanced unemployment benefits discourage many from trying to return to work. We assume that the next federal aid package will continue some form of unemployment bonus payments and will not provide nearly enough funds to help states and localities avoid further cutbacks.
If this is the case, then while payroll employment could fall by 15% in absolute terms in the second quarter from its first-quarter peak, its third-quarter rebound would be a much more modest 1% and employment growth would only average 2% per quarter in the following three quarters followed by 3% quarterly gains in the second half of 2021.
The data will likely look even worse when it comes to the unemployment rate. The 14.7% reading for April, while the worst since 1940, still severely undercounted unemployment because of former workers who misclassified themselves as being either still employed or out of the labor force entirely. We expect this to be partly rectified in employment reports over the next few months, which could push the unemployment rate above 20%. Thereafter, the same forces slowing a rebound in employment should keep the unemployment rate high and it is possible that it will still be in the mid-teens by the end of 2020 and above 10% by the end of 2021.
A Pattern For Profits
At first glance, the outlook for corporate profits should be absolutely dire. On average, in the 11 recessions since 1947, real output has logged a peak-to-trough decline of 2.2%. However, profits are much more cyclical than the economy overall and nominal adjusted after-tax profits have fallen by an average of 17.1% in the associated profit recessions. (It should be noted, however, that the dates of the profit recessions and output recessions don’t line up exactly, with profits tending to peak an average of two quarters before and trough one quarter before the associated economic recessions.) Given this relationship, and a possible greater than 11% peak-to-trough fall in real GDP, it would seem possible for profits to turn negative for one or more of the upcoming quarters.
However, it is likely that profits will avoid this fate for a number of reasons.