April 24, 2020

One of the few things we know is that in recent weeks 26 million Americans have lost their job. This guarantees that the second quarter GDP decline will be record-breaking. We currently anticipate a contraction of 35%. It could be bigger. But whether the decline is 20% or 50% is less important than what happens in the third quarter. How quickly are firms able to hire back temporarily laid off workers? How quickly are consumers willing to return to restaurants, bars, and retail shops? How quickly does $2.5 trillion of fiscal stimulus filter into the economy? Third quarter GDP growth should be positive and larger than the second quarter drop. We currently anticipate a third quarter growth rate of 50.0%. That is a record-breaking increase following a record-breaking second quarter decline.

In five weeks 26 million Americans have lost their job. In the so-called “Great Recession” of 2008-09 employment declined 8.7 million over a two-year period. What we are experiencing is record-shattering. The monthly employment reports for April and May will help to define the magnitude of the second quarter GDP drop. We expect payroll employment to decline 10 million in both April and May. The total drop of 20 million workers represents 12% of the labor force. Expect the unemployment rate to climb to 15% by May. These changes in employment suggest a second quarter GDP contraction of about 35%. But layoffs are certain to climb further in the next several weeks so the second quarter GDP decline could be even bigger. That is breath-taking.

But then what? Two things are going to happen simultaneously.

First, the corona virus is showing some early signs of slowing down the pace of its spread across the U.S. As a result, many states are planning to re-open for business. Some in late April. Many at various dates in May. As a result, some of those laid off workers will return to their jobs between now and summer.

It is true that many people can make more money from the combination of their state unemployment benefits and the $600 per week being offered by the federal government than they would make by returning to work. This unintended consequence of the initial stimulus bill will delay the process of getting workers back on the job. However, those federal benefits currently lapse at the end of July and the pace of hiring will accelerate in August and September.

Second, fiscal stimulus dollars will be quickly working their way into the economy. There are now two fiscal stimulus packages that have been passed – the initial $2.0 trillion program and now, this past week, an additional $0.5 trillion aimed at replenishing the paycheck protection program for small businesses. The intention is to get money into the hands of individuals and businesses quickly. Indeed, many of the $1,200 refund checks have already been issued electronically with many more paper checks scheduled for May. The $600 per week of federal unemployment benefits are beginning to be disbursed. Money is beginning to flow to hospitals. By the end of May most of that $2.5 trillion should have been received.

If second quarter GDP declines by 35%, that translates into a drop of $1.7 trillion. If all $2.5 trillion of the already passed fiscal stimulus finds its way into the economy in the third quarter, that piece by itself ensures in a third quarter growth rate of 57%. And that does not include any contribution from the private sector as stores and factories reopen and workers return to their jobs.

But first things first. We will get our initial look at first quarter GDP growth on April 29. We anticipate a decline of 3.5% as extreme weakness in the second half of March more than offset strong data in January and February, and turned what would have been a respectable growth rate of 2.2% into a decline of 3.5%.

Second quarter GDP – expected to show a decline of 35% –will not be released until the end of July. However, the monthly data for April and May will allow us to refine that estimate. We expect payroll employment to decline 10 million workers in both April and May for a total drop of 20 million. But because more than 26 million Americans have already lost their jobs since the middle of March, it is possible that the employment declines are even larger than we anticipate and we could be looking at a second quarter GDP drop bigger than the 35% we currently anticipate.

Whatever the decline in second quarter GDP turns out to be, expect a positive third quarter GDP growth rate that is even bigger. Specifically, following our expected 35% GDP decline in the second quarter, we now anticipate a third quarter GDP growth rate of 50%.

Those numbers sound unbelievable. Agreed. But the current situation is also unbelievable. More than three times as many workers lost their jobs in five weeks than lost them in two years in the so-called “Great Recession” – 26 million versus 8.7 million. And the job loss is certain to increase in the weeks ahead. Equally unbelievable is $2.5 trillion of fiscal stimulus injected into the economy within a matter of months. The combination of these two factors will produce record-breaking GDP changes – in opposite directions – in the second and third quarters of this year.

Hang onto your hats. It is going to be a wild ride.

Stephen Slifer


Charleston, S.C.