The Congressional Budget Office (CBO) announced on Monday it now projects the coronavirus crisis will result in nearly $16 trillion in lost economic growth over the next decade. The CBO said that would equal 5.3% of lost GDP in the next 10 years. Let’s put those numbers, which are nothing more than an educated guess, into perspective.
The CBO had been hesitant to put out such a figure since there is still so much we don’t know about the coronavirus, and especially since no one knows for sure if there will be second wave of the outbreak this fall and winter. But the CBO was responding to requests (demands?) by Senators Chuck Schumer (D-NY) and Bernie Sanders (D-NH) for such an estimate (before the election, of course).
In the big picture, the CBO has just admitted that it agrees with me that the COVID-19 crisis will likely be worse and much longer-lasting than most forecasters currently expect. Most forecasters are still clinging to the idea that we’ll see a powerful “V-shaped” economic rebound in the second half of this year.
Such rosy forecasts assume US consumers will come roaring back in the second half of this year, spending with abandon. Regular readers will recall I have consistently questioned this assumption in recent weeks. I have cautioned that consumers will be reluctant to go back to their old spending habits anytime soon, and there’s new evidence I’m right.
Last Friday, the Commerce Department announced that the US savings rate soared by a historic 33% in April. The April savings rate – how much people save as a percentage of their disposable income – is by far the highest since the government began keeping such records in the 1960s, and up from 12.7% in March.
The unprecedented jump in the savings rate occurred despite the fact that over 42 million Americans have lost their jobs in the last three months and have applied for unemployment benefits. The spike in the savings rate was aided by stimulus checks many Americans received from the government, which most decided to save rather than spend, as I predicted.
Another way many Americans were able to boost their savings significantly is they dramatically cut back on spending. US consumers reduced spending by a record 13.6% in April alone, according to the Commerce Department. And that number for April could be revised higher just ahead. Plus, most forecasters believe consumer spending declined again in May.
To be fair, it’s not as if consumers made a conscious decision to slash spending last month. That’s part of it, but let’s not forget that much of the economy was in lockdown mode with fewer opportunities for consumers to spend as usual.
So, while incomes also increased by 10.5% in April, reflecting the $3 trillion worth of government social benefits paid out during the month, spending still fell off a cliff. As regular readers know, consumer spending accounts for almost 70% of GDP. Notice in the chart below how average bank checking account balances soared during the economic lockdown.
As a reminder, US Gross Domestic Product is the sum of all goods and services produced in the US in any given year. In 2020, the Commerce Department estimates that GDP will be apprx. $21.5 trillion. If GDP rises by $16 trillion less than it should have before the coronavirus over the next decade, meaning an average annual loss of $1.6 trillion per year for the economy.
The bottom line, as I have repeatedly cautioned recently, is that the US economy is not likely to come roaring back in the second half of this year, as many forecasters predict. Even the CBO said in its latest report on Monday that the economy could rebound by over 30% in the second half of this year. That assumes a huge increase in consumer spending just ahead.
I simply don’t see it. I continue to believe the COVID-19 crisis will be with us longer than most forecasters believe, especially if there is a second spike this fall and winter. Just because the CBO suggests we will see a significant jump in consumer spending in the second half of this year, that doesn’t mean it will actually happen.
While I would not rule out an economic recovery in the second half of this year, I believe it will be much more tepid than the CBO and most forecasters believe today. People are worried and for good reason. I sincerely hope I’m wrong!
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