Coronavirus Damage: Economists, Experts, Analysts Predict Catastrophic Drop In Second Quarter US GDP

Various forecasters predict that the coronavirus pandemic will lead to a crushing, historic plunge in U.S. gross domestic product in the second quarter of this year – although most expect the economy to recover in the second half.

JPMorgan said on Thursday that it expects U.S. GDP will plunge by 40% in second quarter, with the unemployment rate soaring to 20%.

In a previous forecast, JPMorgan economists said second-quarter GDP would fall by 25%.

Noting that almost 17 million people filed for unemployment benefits in the past three weeks, the economists pointed out that “with these data in hand we think the April jobs report could indicate about 25 million jobs lost since the March survey week, and an unemployment rate around 20%.”

They anticipate a 10% GDP decline in the first quarter

However, they added that the malaise will be temporary and predict a recovery in the second half of the year, predicated on the assumption that the debilitating effects of the pandemic will fade away by June.

JPMorgan predicts that GDP will surge by 23% in the third quarter, followed by a 13% increase in the fourth quarter.

The economists also lamented the difficulties in making forecasts in what has become an unprecedented crisis.

“Over the last few weeks forecasters have been operating in a fog. Economic models that have been trained on post-war data face obvious limitations. In their place we have reverted to differing ways to address the outlook,” they wrote. “The long-run destruction of the level of output is difficult to quantify, but likely quite large.”

Earlier in the week, JPMorgan Chase CEO Jamie Dimon issued similar dark prognostications.

"The world is confronting one of the greatest health threats of a generation, one that profoundly impacts the global economy and all of its citizens," he wrote in his annual letter to shareholders. "As a nation, we were clearly not equipped for this global pandemic, and the consequences have been devastating. But it is forcing us to work together, and it is improving civility and reminding us that we all live on one planet."

Dimon also praised the actions taken by the federal government and the world's central banks, including the Federal Reserve, to fight the effects of the pandemic.

But he cautioned: "We have to be prepared to operate under extremely adverse circumstances."

With respect to his own bank specifically, Dimon warned: "We are exposing ourselves to billions of dollars of additional credit losses as we help both consumer and business customers through these difficult times.”

Other economists and analysts have painted similarly gloomy scenarios.

On Wednesday, Pacific Investment Management Co., or PIMCO, said it expected the U.S. economy to shrink by 30% in the second quarter and by 5% for full year 2020.

Tiffany Wilding, a North American economist at PIMCO, wrote that recent jobs data suggests the unemployment rate could jump to as high as 20%.

Wilding noted that while she expects an economic recovery in the second half of the year, the shock plunge in the second quarter will be unprecedented. She noted that even in the darkest days of 2008, quarterly GDP never sank more than 8%.

“The speed and magnitude of the U.S. labor market disruption has been sharper than any we’ve seen in recent history, suggesting that the decline in overall activity has also likely been much more severe,” wrote Wilding.

Wilding said jobless figures will continue to climb, given the enormous number of non-essential businesses that have closed across the country.

She also frets that huge fiscal and monetary stimulus programs unveiled by the federal government might not be enough to prevent a flood of corporate bankruptcies and defaults. She noted that speculative-grade companies, which are not qualified to receive stimulus or benefit from bond-buying programs, are likely to endure a massive surge in bankruptcies.

On Monday, Credit Suisse forecast that the U.S. economy will contract by 33.5% in the second quarter.

However, like JPMorgan and others, Credit Suisse then expects the economy to rebound in the second half of the year. The bank expects GDP will jump 19% in the third quarter and advance 11% in the fourth quarter.

For the full year, Credit Suisse projects GDP will decline by 5.3%, nearly double the 2.8% drop in 2008 during the global financial crisis.

The former chief of the Federal Reserve, Janet Yellen, also warned of cataclysmic economic damage. On Monday, she said she thinks second-quarter GDP may decline by 30% in what she described as an “absolutely shocking” downturn.

“If we had a timely unemployment statistic, the unemployment rate probably would be up to 12% or 13% at this point and moving higher,” Yellen said. “This is a huge, unprecedented, devastating hit, and my hope is that we will get back to business as quickly as possible.”

However, Yellen was not certain that a sharp recovery was in the cards.

“I think a ‘V’ [shaped recovery] is possible, but I am worried that the outcome will be worse and it really depends… on just how much damage [there is] during the time that the economy is shut down in the way it is now,” Yellen said. “The more damage of that sort [that we see], the more likely we are to see a ‘U’ [shaped recovery] and there are worse letters like ‘L’ [shaped recession] and I hope we don’t see something like that.”

These gloomy forecasts may have been kickstarted a week and half ago when Goldman Sachs said it predicted a 34% contraction in second quarter GDP – compare with its earlier estimate of a 24% plunge,

Goldman economists led by Jan Hatzius also warned the jobless rate will jump to 15% by mid-year (up from a prior forecast of 9%).