Deloitte: United States Economic Forecast 2nd Quarter 2020

The pandemic has dealt a massive blow to consumer spending and GDP, and uncertainty about medical and economic issues will likely hold back investment. When will the US economy begin a strong recovery? Probably not before the middle of 2021.

It's now official: The SARS-CoV-2 virus and its associated disease have dealt a severe short-term blow to the American economy. In two months, Bureau of Labor Statistics estimates showed the economy losing more than 20 million jobs in March and April (about one-seventh of the total number employed in February). As expected, sectors such as arts, entertainment, and recreation services (down 55%) and accommodation and food services (down 47%) were hardest hit. But all private-sector industries saw job losses.1 Ever since mid-March, when states begin to shut down “nonessential” sectors, we’ve known this would happen.

The decline in consumer spending is driving the downturn. Our forecast for near-term consumption is based on an evaluation of consumer spending by detailed sector—and that yields a substantial decline in GDP. Just two key categories of consumer spending—food services and accommodations and recreation services—together account for 8% of GDP. And that doesn’t account for the decline in business spending in those areas. Consumer durables account for another 7% of GDP; sales in that sector have also dropped. And health care services account for 10% of GDP; much of this sector stopped production because of the risk, as well as the need to open up hospital capacity for COVID patients.

This adds up to a huge decline in consumer spending and GDP; our baseline forecast shows GDP falling over 17% in the first two quarters of 2020. The initial consumption shock is only the start of the trouble: Investment spending is expected to decline, due to lower consumption and the continuing high level of uncertainty. Residential construction is expected to slow as many consumers may find themselves newly unable to afford new houses, even at rock-bottom mortgage rates. And, of course, exports will likely drop as economic activity slows abroad.

That’s in the short run. But the long run matters as well. Our five-year forecast horizon forces us to ask the question, “Are we really going to end up where we started?” And the answer is probably no.

There are two reasons why the economy won’t simply go back to where it was. And both suggest that productivity growth and profits are likely to be slow as the economy moves back toward full employment.

First, demand patterns are likely to change, particularly if fighting the disease proves to be a long, hard trek. In the absence of effective near-universal vaccination, sectors that require people to gather in close quarters (such as live entertainment, sports, restaurants, and travel) are likely to struggle even if venues fully open.

Second, business practices are also likely to change, and in ways that may restrain productivity gains. For example, key supply chains may be re-shored as business and government newly evaluate the risks of over-reliance on overseas manufacturers in areas such as pharmaceuticals. And businesses may rethink the emphasis on just-in-time inventory systems in a world where complex supply chains have been proven to be relatively fragile. Both international trade and supply chain management have contributed to productivity growth over the past few decades,6 and reversing both trends would create a drag on productivity growth. At the extreme, the economy could experience a medium-term trend of declining productivity as companies reengineer to these less productive (but safer) practices.

It all leads to a strong likelihood of a slow recovery and, in the end, GDP at a substantially lower level than the pre-COVID trend suggested. We’ve incorporated this into our forecast by assuming that the baseline is still 5% below our pre-COVID forecast at the end of our five-year outlook, even with unemployment returning to close to full employment.