The U.S. economy is expected to shrink at an annual rate of almost 40% in the second quarter, and the budget deficit will explode, the nonpartisan Congressional Budget Office said Friday.
In its first comprehensive look at the economic and fiscal damage done by the coronavirus, the CBO also said the unemployment rate would peak at 16% in the third quarter of the year.
“The economy will experience a sharp contraction in the second quarter of 2020 stemming from factors related to the pandemic, including the social distancing measures put in place to contain it,” said CBO Director Phill Swagel, in a blog post on the agency’s site.
“In the third quarter, economic activity is expected to increase, as concerns about the pandemic diminish and state and local governments ease stay-at-home orders, bans on public gatherings, and other measures restraining economic activity. However, challenges in the economy and the labor market are expected to persist for some time,” Swagel said.
The CBO chief said the budget deficit would hit a nominal record of $3.7 trillion, well above the $1.413 trillion seen in 2009.
The impact of the sharp drop in output on the government’s bottom line would be sharp. In addition to the $3.7 trillion 2020 deficit, the CBO said government debt held by investors and other members of the public would reach 101% of the size of the U.S. economy by the end of the fiscal year in September. At the end of the 2019 budget year, it totaled 79.2%.
The glut of debt was not expected to have much impact on demand for U.S. paper, though. Interest rates on the Treasury 10-year note
were projected to average 0.8% for 2020 and fall to 0.7% in 2021.
Swagel warned the forecast is subject to “enormous uncertainty,” but falls in line with those in the private sector and is closer to those forecasts that see more weakness in the near-term.
“CBO’s projections incorporate an expectation that the current extent of social distancing across the country will continue—on average and with regional variation—through June. The agency’s projections also include the possibility of a reemergence of the pandemic. To account for that possibility, social distancing is projected to continue, although to a lesser degree, through the first half of next year,” Swagel wrote.
In its projections for gross domestic product, the CBO said the size of the economy would shrink by 11.8% in the second quarter compared with the first quarter, a pace that, if maintained, would result in a 39.6% drop on an annualized basis. For the third quarter, the CBO sees growth returning, with GDP rebounding at a 23.5% annual rate.
On the jobs front, unemployment is projected to hit 14% in the second quarter, peak at 16% in the third quarter before dropping back to 11.7% in the last three months of the year. “The increase in that rate in the second and third quarters reflects the net effect of a projected loss of nearly 27 million in the number of people employed and the exit of roughly 8 million people from the labor force,” Swagel wrote.
Swagel said the CBO will release more details on its projections in mid-May.
U.S. equity benchmarks finished higher on Friday. The Dow Jones Industrial Average
was up 260 points to 23,775.