Forecasters around the country are slashing their predictions for 2020, and the downward revisions seem to be getting more dire with each passing day. Before I get into the latest worrisome forecasts, recall that back in January, most forecasters expected the US economy to be stronger in 2020. Most, including the Federal Reserve Bank, predicted that 1Q GDP would rise by 2.5% to 3.0% or better this year.
Not anymore. The coronavirus has changed everything, and now the vast majority of forecasters see a recession or worse just ahead and are scrambling to revise their estimates down significantly. On Tuesday, for example, Goldman Sachs slashed its estimate of 1Q economic growth and its forecast for all of 2020.
Specifically, Goldman slashed its estimate of 1Q GDP from a gain to a loss of 9%. That’s a huge move! But it gets much worse. Goldman now predicts that 2Q GDP will plunge by 34%. If the economy does in fact come in negative for the 1Q and then goes much deeper negative in the 2Q, that more than satisfies the textbook definition of a recession – which is two consecutive quarters of negative growth in GDP.
Fortunately, Goldman maintained its previous optimism about growth in the second half of this year, now predicting a rebound with 3% growth in the 3Q and 4% in the 4Q. On the one hand, 3-4% growth in the second half of this year might seem doable in the wake of a 30+% plunge in the 2Q. On the other hand, such estimates of second half growth may be way too optimistic.
For starters, if GDP plunges by 30% or more in the 2Q, American consumers are going to be shellshocked in my opinion. None of us have ever witnessed anything like that in such a short time. For that reason, I am not nearly as optimistic that the economy will bounce back strongly in the second half of the year – even if families of four get a stimulus check from Uncle Sam for $3,400 ($1,200 per adult and $500 per child) in April.
I do not believe families who are expecting the greatest economic implosion in their lifetimes in the 2Q are going to be in the mood to run out and spend their stimulus checks right away. I could be wrong, but I doubt it. If I am wrong, it will be because we won’t know how bad the 2Q will be until the end of July when the first government estimate of 2Q GDP will be released.
In any event, I will be shocked if consumers rush out and spend their stimulus money when they receive it late this month or in early May. And there’s more really bad economic news we are about to start receiving each month: the unemployment rate is about to skyrocket.
Last week, the states reported that almost 3.3 million Americans filed for new unemployment benefits, which was a shocker – that is, until today. This morning we learned that 6.6 million workers filed for unemployment in the latest week – double the record set last week. And we’re nowhere near done yet!
Last week, the Federal Reserve warned that the number of unemployed Americans could rise by 47 million or more just ahead, skyrocketing the official unemployment rate from 3.6% last month to 32% or more in the 2Q. We get these monthly jobs reports on the first Friday of each month, so consumers will be seeing these scary numbers long before we know how bad GDP growth will be in the 2Q. If you think people are scared now, and they are, it will get worse.
The so-called “Bond King,” Jeffrey Gundlach, CEO of DoubleLine Capital, warned this week that in his opinion, we have not seen the worst in the stock markets yet. He predicted new lows just ahead. “It looks like a depression scenario,” he warned.
He further added on Tuesday regarding his latest outlook for the stock and bond markets that: “It [stock market] won’t be back to where it was prior for a long time to come — on a real basis, and bonds aren’t likely to produce meaningful real returns for some time.” I’ve never heard Gundlach be this bearish.
I hate to be the bearer of bad news, I really do. But it seems obvious to me that there’s plenty more bad news coming in the weeks ahead. Hopefully, things won’t be as ugly as a lot of forecasters are predicting, and the massive stimulus efforts by the government will soften the blow to the economy.
Time will tell. In the meantime, try to not get overstressed. Feel free to call or e-mail me if you’d like to talk. Remember, we’ll get through this. We are America after all!
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