As more data comes in, we are getting a clearer picture of the US economy during the COVID-19 pandemic—and after it. Here, our update for the first full month of major disruption to American business and society.
Deloitte’s Q1 US economic forecast reflected the understanding that significant sectors of the economy would be shut down starting in the middle of March.1 At the time we completed the forecast, we had little actual data about the possible impact of shutdown orders in many states. And most people were just beginning to learn how the disease might progress.
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As of April 17, data is coming available, along with more information about the disease and about how the postcrisis period might develop.2
Much of the economic data has reflected an initial shock—especially to employment—that is much larger than we forecast. Initial unemployment insurance (UI) claims for the first five weeks of the crisis—starting with the March 21 figure—topped 26 million. That is more than a sixth of the national labor force, implying an unemployment rate in April of more than 17 percent, and may understate total unemployment due to some state systems struggling to process filings.3 The rate is likely to rise even more in May as additional UI claims are filed, although the rate of initial filing will probably fall. But it’s very likely we’ll see a monthly (or even quarterly) unemployment rate higher than 15 percent.
Retail sales and industrial production for March show some initial impact of the shutdown. Retail sales were down almost 9 percent, but the impact was understandably uneven considering consumers’ rapidly shifting priorities. As we expected, sales at food and beverage stores and health and personal-care stores were up, but this could not offset large declines in purchases of automobiles and, of course, food services. Sales in these categories fell about a quarter, suggesting that additional bad news will show up in the April data (to be released in May). After all, few people are buying cars or restaurant meals right now.
Industrial production fell 5.4 percent, and the April figure will likely be much worse. Even so, the March figure tells us that industrial production fell at an annual rate of 7 percent in Q1 (compared to Q4). Our forecast for a 7 percent decline in GDP in Q1 anticipated the size of this impact.
After a rapid spike in volatility in March, stock markets around the world have become a bit more stable. The CBOE volatility index (VIX), after reaching a level last seen during the financial crisis, has declined significantly. The S&P 500 index has risen by around a fifth since the recent low on March 23. Other stock indices around the world have rebounded as well. Of course, a lot is still unknown, including how much the second-quarter decline in GDP will affect company earnings and stock market expectations.
Bond markets have also stabilized somewhat, with investment-grade corporate bond issuance reaching a record level. Companies are shoring up cash in all possible ways. Even speculative-grade companies were able to find investors, albeit at much higher yields. The unprecedented support from the Federal Reserve has helped defray the bond market tensions evident a few weeks ago. The repo market has also adjusted well to the new realities, with the Fed stepping back its repo actions.4 The demand for USD in foreign markets also got some help from the Federal Reserve’s swap lines with certain key foreign central banks.
All in all, it appears the stress in the financial markets, as measured by the St. Louis Fed’s Financial Stress Index, has abated for now, even if daily stock market volatility persists.5
In March, we assumed that, as we wrote, “the immediate economic impact is likely to fade within the year, as a vaccine or the natural progression of an epidemic reduces the number of infections and consumers venture out of their homes to resume eating at restaurants and shopping for more than groceries and hand sanitizer. The economy will likely recover quickly once that happens.” This was the consensus view among economists, but it is becoming apparent that recovery will be a longer process.
The timeline is extending for two reasons. First, experts are beginning to publish and debate suggested plans for recovery.6 The consensus seems to be that most governments and businesses will phase in reopening and recovery policies cautiously, and that social distancing measures will continue to play an important role in people’s lives. That, in turn, means that a full-scale return to economic activity is unlikely until a vaccine or more effective treatment is developed. Businesses that depend on crowds—live professional sports and theaters, for example—are likely to remain closed for months or longer, due both to public health policies and consumers’ aversion to risk.7 The need for a phase-in of economic activity will slow the recovery. And if a large number of people remain unemployed or out of the labor force, they could deplete their savings, reducing the demand for durable consumer goods over a longer period of time.
On top of that, even if parts of the country were to “reopen” or attempt to return to the pre-March situation, many people would not immediately resume their previous spending patterns. Absent a vaccine, household behavior is likely to remain very conservative, with higher savings rates and less willingness to purchase services, such as recreation or restaurant services, that might be perceived as risky.
This suggests that the Long, hard trek to recovery scenario in our March forecast may be a more realistic view of the immediate future after governments remove stay-at-home orders. While opening closed factories and offices promises some bounce back, demand for many products may be subdued until the labor market strengthens and people feel more secure about their health, safety, and economic future.