The U.S. Likely Faces a Deep, Hopefully Short Recession

The severe damage already evident in the U.S. labor market is a clear signal of the recessionary plunge in economic activity. We now forecast real U.S. GDP will contract over −5% over the full year of 2020, with the deepest contraction in the second quarter – an estimated quarterly drop of nearly −30% (annualized). The unemployment rate could temporarily reach close to 20%. The dire U.S. economic outlook has prompted monetary and fiscal policymakers to respond with massive support for struggling sectors and communities to help bridge the gap from hurting to healing, as we discuss in PIMCO’s latest Cyclical Outlook. However, despite all of the policy support, we still see downside risk to the outlook. Government support may not be quick or effective enough to thwart business bankruptcies, while consumer preferences toward savings and consumption could be forever changed.

We knew it would be bad – just not how bad

The health and humanitarian crisis caused by the coronavirus is tragic, and the effect on the economy of containing it is staggering. Recently released official labor market statistics are just starting to show how virus containment measures are halting U.S. activity with stunning scope, scale, and swiftness. Initial jobless claims for the week ended 28 March skyrocketed to 6.6 million individuals, breaking the record set just the previous week (3.3 million) for the highest one-week increase (source: U.S. Department of Labor). The cumulative increase in initial claims in the three weeks through 28 March is now over 6% of the U.S. labor force.

Unsurprisingly, New York and California – two of the earliest states to mandate nonessential business closures – accounted for the largest increase in initial jobless claims over the three-week timeframe. But other states have also reported surges in initial claims, including those whose GDPs heavily rely on manufacturing (Pennsylvania, Michigan, Ohio, Illinois, Indiana) and oil (Texas).

Furthermore, the Bureau of Labor Statistics’ (BLS) March 2020 employment report, although backward-looking, revealed that mass layoffs were happening earlier than implied by the jobless claims data. The March BLS household survey showed that a reduction of three million jobs happened before the 12 March survey week – and that these layoffs were spread across a wider range of industries than just accommodation, food service, and retail. While food service did shed a reported 459,000 jobs in March, health care – which we thought would be relatively resilient – reported a record number of job losses.

Despite the stunning number of job losses, we think they are likely to climb further in the next several weeks as more states close nonessential businesses, and as unemployment insurance claims offices work through a growing backlog. These cumulative job losses could very well reach 20% of the labor market.