The Congressional Budget Office (CBO) released its latest economic forecasts on Tuesday, and while grim overall, some of them are still too optimistic. The most glaring example is the CBO’s forecast that the US unemployment rate will peak at 15.8% in the 2Q. Really?
You will recall that the Labor Department reported last week that the official unemployment rate for April was 14.7% but also disclosed that this reading was almost certainly too low. That’s because new claims for unemployment benefits were flooding in faster than they could process them. As I stated on Tuesday, most forecasters believe the real unemployment rate for April was close to 20% and will likely move above 20% for May and possibly even June.
Yet here comes the CBO predicting that the jobless rate will peak at only 15.8% for the 2Q. It’s no secret that government agencies have a tendency to overstate good news and understate bad news, but this disparity over the real unemployment rate is off the charts! I fully expect the CBO to revise its jobless rate forecast significantly higher over the next couple of months.
The CBO also said it expects the unemployment rate to average 9.3% for all of 2021, with it falling to 8.6% by the end of next year. That, too, could be optimistic if the economic lockdown continues into the summer, and if businesses continue to be forced to operate at only 25%-50% of capacity. And of course, it remains to be seen how consumers respond after this crisis.
Surely, the most surprising forecast in the CBO’s latest round of estimates is its prediction that only about 30% of laid off workers will be rehired this year. There are now over 38 million workers who have been laid off or furloughed in the last three months. If the CBO is correct that only 30% will be rehired this year, that still leaves well over 25 million workers out of a job.
The CBO was careful not to bring any extra attention to this chilling forecast. I suspect they know if the media picks up on it, they will have a field day and use it repeatedly to beat up on President Trump. The 30% rehire figure is far below the current media consensus. It will not surprise me if the CBO revises this forecast just ahead. Let’s hope so, anyway!
The CBO also revised its estimates of US Gross Domestic Product for 2020. You may recall the Commerce Department reported late last month that GDP fell by 4.8% (annual rate) in the 1Q. We all know the largest damage came in the 2Q as the coronavirus crisis intensified. The only question is, how bad?
According to the CBO, really bad! The CBO now predicts that 2Q GDP plunged by 37.7% (annual rate). That is more than twice the worst single quarter drop ever recorded! The good news is the CBO expects a strong rebound in the 3Q with GDP jumping by 21.5% followed by another rise of 10.4% in the 4Q. For all of 2020, the CBO sees GDP falling 5.6%.
Unfortunately, I believe the CBO is far too optimistic about a strong rebound in the 3Q and 4Q. And this is why I say in today’s title that the CBO “contradicts itself.” Here’s why: If the CBO truly believes that only 30% of currently laid off workers will be rehired the rest of this year, then it is unrealistic to believe GDP will rebound by 21.5% in the 3Q and 10.4% in the 4Q.
Those numbers just don’t add up. They also suggest the coronavirus crisis will mostly be behind us by next month. And the economy will surge sharply higher this summer, they say. I sincerely hope I’m wrong, but I just don’t see that happening.
Few Americans alive today have ever seen anything like what has just occurred. Furthermore, few of us ever imagined something this mindboggling could remotely happen. Not even most in the “gloom-and-doom” crowd saw something this bad happening, and they’re always bearish!
As you know, consumer spending accounts for apprx. 70% of GDP, and I just don’t see consumer spending rebounding nearly as quickly and as strongly as the CBO apparently does.
I’ll sum it up this way, for those of you old enough to remember the 1950s TV sitcom I Love Lucy which still airs in reruns to this day. Ricky Ricardo (Desi Arnaz) often said to Lucy (Lucille Ball) in his Cuban accent, “You’ve got some splainin’ to do.”
In this case, I say the CBO’s got some splainin’ to do!
Have a great Memorial Day weekend everyone and remember why we celebrate and revere this holiday! I’m excited because our kids and their spouses are coming home for the weekend for the first time since the Christmas holidays, and I’ll be cooking and entertaining to my heart’s content.
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