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ECONOMY: The Great Uncertainty

The best-case economic scenario is where output and employment will likely not return to pre-recession levels until 2022.

With the U.S. and countries around the world aggressively acting to contain the COVID-19 outbreak, the economic outlook has changed dramatically in the span of a few short weeks.

Manufacturers came into this year with a sense that the global economy was stabilizing, albeit with ongoing weaknesses. The signing of the United States-Mexico-Canada Agreement and the so-called phase one deal with China also provided much-needed trade certainty for businesses. And after serving as a drag on growth for three straight quarters, signs that non-residential fixed investment might rebound somewhat in the first quarter helped increase optimism. Most importantly, at the year’s start, fears of a recession, which were pervasive last summer, abated almost entirely, with the Federal Reserve’s three rate cuts in 2019 doing their job to keep the economy growing.

Indeed, the Manufacturers’ Outlook Survey from the National Association of Manufacturers echoed this sentiment, with the percentage of respondents who were positive about their own company’s outlook rising from 67.6% in the fourth quarter of 2019 to 75.6% in the first quarter of 2020, a reading that was slightly above the historic average for the 21-year survey (Figure 1).


Real Gross Domestic Product is expected to plummet by 32.5% in the second quarter.

‘Jaw-Dropping’ Declines 

Of course, the global economy has changed materially since then. With that said, the second-quarter survey reflected a sizable drop in confidence, with roughly 34% of respondents positive in their outlook, and the top challenge was the economy. The primary concern for the previous ten quarters was the inability to attract and retain a quality workforce, a finding that mirrored other data and was consistent with an unemployment rate that was at 50-year lows.

Now, of course, nearly 39% million Americans have filed for unemployment insurance since mid-March, with an unemployment rate that could easily exceed 20%—double what was seen at the worst of the Great Recession (Figure 2). Many segments of the service sector have been hit especially hard, with stay-at-home orders closing businesses or limiting service. Indeed, personal spending plummeted by a record 7.5% in March, and the saving rate jumped to 13.1%, the highest rate since November 1982. Real GDP shrank 4.8% in the first quarter, but it is expected to fall by a jaw-dropping 32.5% or more in the second quarter. In addition, manufacturing production fell 18.57% between February and April.

The other notable development was the oil market battle between the Organization of the Petroleum Exporting Countries and Russia. With oil prices lower than desired, OPEC had wanted to restrict production, but Russia, which is not a member of the cartel, did not cooperate, preferring to focus on increasing market share. With no deal in place, Saudi Arabia said that it would also focus on market share, dramatically increasing production and pushing petroleum prices down to levels not seen since 2002. This may likely result in sizable pullbacks in energy output, potentially damaging manufacturers and the macroeconomy, especially if it is prolonged.

The U.S. is a major energy producer, helping to fuel the manufacturing renaissance experienced since the end of the Great Recession and dramatically reducing our dependence on petroleum imports. In fact, the U.S. is now a net exporter of energy, but the current petroleum prices at the time of this writing—should they hold for a prolonged period—will likely damage that domestic supply, particularly for the smallest producers.

The larger economic repercussions could be significant, further damaging manufacturing activity around the country, even as businesses and consumers might benefit from cheaper energy costs.

There is great uncertainty in several significant factors contributing to our overall economic outlook.

These developments are quite fluid, likely to change before publication of this column, but as of this writing, there is an expectation that the U.S. economy will start to rebound in the third quarter, with a forecast of roughly 16% growth in real GDP. Yet, the economic damage will have already been done by that point, with the U.S. economy shrinking by 4.5% in 2020. Even with some improvements later this year, manufacturing production is seen falling by 6.6% this year, and the unemployment rate will likely still be roughly 10% by year’s end.

A Question of Confidence 

The willingness of consumers and businesses to get back to normal will be the ultimate wild card in any economic forecast. How quickly will people be willing to go out to restaurants, to the movies, to fly, to go to an amusement park, to cheer at their favorite ballpark? This could take a while, perhaps longer than businesses might prefer. As such, the best-case scenario is one that is more of a check-mark recovery, where output and employment will likely not return to its pre-recession levels until at least 2022.

Moreover, there are also concerns about the COVID-19 outbreak returning in the autumn and winter months, particularly if there is not a vaccine in place by that point. Such a scenario could lead to another downturn —the so-called w-shaped business cycle where the economy bounces back only to experience another recession. While that cannot be the baseline assumption, the possibility of another outbreak could lead businesses and consumers to be more hesitant, restricting growth in the second half of this year from what it might have been otherwise.  

There are concerns about the COVID-19 outbreak returning in the autumn and winter months.

Absent that scenario, the current forecast is for the U.S. economy to grow 2.3% in 2021, with output in the manufacturing sector rising by 1.7%. Unemployment should fall to 7% to 8% next year. For their part, fiscal and monetary policymakers have been aggressive in their attempts to stabilize the economy, and those efforts have been helpful. The Federal Reserve should keep interest rates near zero well into 2021, with its balance sheet possibly tripling from the $4 trillion in assets seen before the COVID-19 outbreak.

Overall, the outlook for 2021 is one of cautious optimism. The U.S. and global economy should—barring another outbreak—continue the slow process of recovery from what has been the worst economic downturn since the Great Depression. But, as the data above suggest, economic conditions later this year and next year will also be radically different than what was seen in January and February (pre-COVID-19). That means that business conditions will likely continue to be challenging, particularly for certain sectors.   M

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