Mohamed El-Erian on the Current Economic Environment (April 30)

Here's a link to a recent interview (April 30) with Mohamed El-Erian, chief economist for Allianz, in which he provides insight into the current economic environment along with policy responses.  His main points include:

• the severity of the current downturn
• concerns about the long-term effects of current monetary policy, while thinking that it is the best option available
• the need to implement policies that are more likely to result in inclusive, sustained long-run growth as opposed to just reacting to the current crisis

Latest Forecast from the CBO

The Congressional Budget Office just released their latest forecast about the economy through the end of 2021 (while acknowledging a high level of uncertainty).  Here are some of the most interesting numbers:

Economic growth

• Q2: -39.6%
• Q3: +23.5%
• 2020: -5.6%
• 2021: 2.8%

Unemployment Rate:

• Q2: 14%
• Q3: 16%
• Q4: 11.7%
• 2021Q4: 9.5%

note: labor force declines by 6 million between now & the end of 2021

Budget Deficit:

• 2020: $3.7 trillion (17.9% of GDP)
• 2021: $2.1 trillion (9.8% of GDP)

More Economic Forecasts

Nearly 17 million people have filed new claims for unemployment in the last 3 weeks; this will exceed 20 million when the next report is released this coming week.  That said, unemployment does not rise only due to layoffs, but also lack of hiring.  How high will unemployment rise?  More importantly, how quickly will it come back down when the pandemic eases?  Here are links to various forecasts released recently:

Bloomberg survey of economists: unemployment rises to 12.6% and economic growth of -25% in Q2
WSJ survey of economists: unemployment rises to 12.6% in June, declines to only 9.7% in December; economic growth of -25.3% in Q2
Economist Intelligence Unit: economic growth of -40% (annualized rate) in Q2
JP Morgan (updated Apr 9): Unemployment reaches 20% in April, economic growth of -40% in Q2

Clearly, the short term is disastrous, with unemployment reaching post-Depression highs; going from a 50-year low to a 80-year high in less than 2 months.What will the recovery look like?  Good question.  The answer depends in part on the progression of the pandemic.  There are indications that we may be reaching the peak of this phase, but concern about a second wave, either if social distancing ends too soon or later in the year.  Also, how quickly will people and businesses seek to return to normal?  Will people gradually return to small gatherings, but be hesitant to participate in large gatherings (100,000 people in a stadium watching college football this Fall?)?  How many small businesses will be damaged enough such that they do not reopen?

It's too early to have confidence in a longer term forecast, but after a surge in unemployment in Q2, there is likely to be bounce when the economy "reopens" this summer (June? July? August?).  Given that, unemployment should come down quickly, but remain quite high (8-10% by the end of the year.  When will we return to 3.5% unemployment? Not in the next several years.

March Employment Report

The BLS (Bureau of Labor Statistics) released the March employment report this morning and it included more of the initial effects of Covid-19 than expected.  Here are some highlights:

• nonfarm payrolls declined by 701,000 (establishment survey)
• unemployment rose from 3.5% to 4.4%
• U6 rose from 7% to 8.7% (this is a more comprehensive measure of "unemployment" that accounts for those who left the job market, but still want a job as well as those working part time for economic reasons)
• number of unemployed (reported by the household survey) rose by 1.4 million (total of 7.1 million); much of the increase is among those reported being on temporary layoff
• number of those working part time for economic reasons increased by 1.4 million (i.e., they still have a job, but their hours were reduced)
• labor force participation rate declined from 63.4% to 62.7%.  So many people left the job market and are not considered to be unemployed.  Without this, the unemployment rate would have increased to 5.4%

As mentioned previously, this report does not account for most of what is going on in the job market, since it reflects information as of mid-March (before much of the damage took place).  Next month's report will reflect the serious damage underway and will likely show horrific job losses and double-digit unemployment.

CBO Forecast

The Congressional Budget Office (CBO) released its updated economic forecast this afternoon.  It anticipates the unemployment rate rising to 12% in Q2, and declining only slightly to 9% by the end of 2021 (yes, 2021).  Economic growth is expected to be -28% in Q2, but perhaps even worse.

Time for one more. Here's a link  from Homebase that tracks data for hourly workers at many small business.  Quoting Greg Mankiw, from whom this link was obtained (gregmankiw.blogspot.com): "It shows that hours worked by hourly employees is down by more than 50 percent (as of March 27). FYI, hourly workers make up about 60 percent of the labor force, most of the rest being salaried workers. It is not clear to me how representative the Homebase data are, but they may turn out to be a good resource for tracking the economy in real time."

Latest Forecasts as of April 2

Bank of America is now forecasting unemployment rising to 15.6% and GDP declining by 10.4% (-7% in Q1, -30% in Q2, -1% in Q3).

David Kaplan, President of the Dallas Fed, predicts unemployment rising to the low- to mid-teens before declining to under 10% (probably closer to 8%) at the end of the this year.  It anticipates a severe contraction followed by a U-shaped recovery (recovery that starts off weak).

Meanwhile, Fitch is expecting a 3.3% decline in US GDP for 2020 (includes Q1 - Q4) - see Marketwatch..  In addition (according to Marketwatch):

          Fitch warned not to expect a V-shaped economic bounce, as the negative impacts on              consumer behavior are likely to linger into next year.

          “Our [new] baseline forecast does not see GDP reverting to its pre-virus levels                                    until late 2021 in the U.S. and Europe,” Coulton said.

And yes, it's now official that about 10 million people filed new claims for unemployment in the last couple of weeks.  Unfortunately, there's more to come.

The NY Fed is publishing a weekly economic index (WEI) to track the behavior of the economy on a more frequent basis than GDP or the unemployment rate.  Here's a link to the article that describes the WEI.  While we have to wait until late April to get the first reading on first quarter GDP (and July for the second quarter), here's a chart showing WEI and economic growth (as well as some other measures of the macroeconomy) as of March 27:

What does the chart indicate in terms of economic growth given last week's WEI? Economic growth from March 2019 to March 2020 = -4%.  As you can tell, all of the decline took place in March 2020.  Given the way GDP is estimated, some of this will show up in the economic growth rate for Q1, but much of it will show up in Q2.