There are no parallels for the pandemic fueled slowdown that the U.S. economy is currently contending with, and that is forcing economists like those of Bank of America Global Research to forecast a decidedly grimmer outlook for the American economy than they offered just two weeks ago.
The BofA researchers on Thursday said the coming recession “appears to be deeper and more prolonged than we were led to believe just 14 days ago when we last updated our forecasts, not just in the US but globally as well.”
The April 2 research report, which includes star economist Michelle Meyer, comes as the number of Americans who applied for unemployment benefits last week soared by a record 6.6 million, bringing the increase in new jobless claims in the last two weeks of March to 10 million.
As MarketWatch reports the scale of the shutdowns of business in force, intended to help mitigate the spread of the deadly pathogen, is unprecedented and is having a substantial negative impact on the labor market and the broader economy.
To that end, BofA sees between 16 and 20 million job losses, which could send the unemployment rate, which stands at 3.5% as of February’s report, surging within a few months to 15.6%, which would by far outstrip the unemployment rate during the 2007-09 recession.
A report on U.S. nonfarm payrolls will be released on Friday, but isn’t likely to show the full extent of the labor-market damage because of when that data was recorded, just before the worst of the coronavirus outbreak.
The BofA team forecast three consecutive quarters of contraction in gross domestic product, “with the US economy shrinking 7% (annualized) in 1Q, 30% in 2Q and 1% in 3Q.”
On the bright side, the economists estimate that the fourth quarter of 2020 will see a sizable pop in business activity as the measures put in place to slow the deadly contagion are slowly unwound.
That said, the cumulative decline in economic expansion will be severe: “We forecast the cumulative decline in GDP to be 10.4% and this will be the deepest recession on record, nearly five times more severe than the post-war average,” the analysts wrote.
Why are the researchers predicting “a recession unlike any other,” as they describe in their report, despite the Federal Reserve’s unprecedented efforts to loosen seized-up areas of the financial market and a limitless bond-buying program as well as a $2.28 trillion relief package that was signed into law on Friday by President Donald Trump?
The analysts say that while they expect the consumer spending to eventually return, turning positive in the third quarter, they anticipate “further contraction in business and residential investment.”
“We also think there will be additional inventory contraction given impaired supply chains and frictions in production,” BofA wrote.
While consumer spending will likely turn positive in 3Q as the economy slowly opens, they still see weakness in the consumer “as they face job cuts and a significant negative wealth shock,” they wrote
“This naturally leads to more cautious behavior,” the analysts said.
Equity markets, meanwhile, have been struggling to process the outlook for the economy. On Thursday, the Dow Jones Industrial Average
the S&P 500 index
and the Nasdaq Composite Index
were all set to open with losses.
World-wide infections of COVID-19, which was first identified in Wuhan, China in December, are nearing one million and more than 48,000 lives have been claimed, according to data aggregated by Johns Hopkins University. Late Tuesday, President Donald Trump warned that the U.S. faced a “very, very painful” two weeks while the White House projected between 100,000 to 240,000 U.S. deaths from the illness.