The U.S. economy will experience about a 6% contraction this year, but will begin to recover from a severe second-quarter downturn in the third quarter, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee.
While the group, made up of 16 chief economists from some of the North America’s largest banks, is unanimous that the economy will expand in the third quarter, there are a wide range of views as to the damage caused by the COVID-19 shock. Four committee members believe the economy will shrink less than 5% in 2020 while just as many see a greater than 8% contraction. The committee members were divided on when they expect economic output to recover to the pre-pandemic level, with the largest number of committee members forecasting it will happen in 2022.
“This is an incredibly uncertain and unprecedented time,” said Catherine Mann, managing director and global chief economist at Citi and the current EAC Chair. “It remains to be seen whether and when consumer behavior and business activity will return to the normal levels we used to know, while many believe there will be substantial changes in the post-pandemic world.”
The divergence of opinion in the committee focuses on the consumer, which has historically accounted for about 70% of the U.S. economy. Fundamental questions remain about the path of the virus and how consumers will react as social distancing restrictions are lifted.
“How long will it take before most people feel safe enough to visit stores, restaurants and movie theaters?” asked Mann. “Consumer spending may be constrained for some time, with consumers unsure about job security and pay.”
The group forecast is that the national unemployment rate, which started the year at 3.5%, will average close to 16% in the second quarter before declining to 10% by year-end. There is substantial divergence in views on how the labor market will evolve, with forecasts for the unemployment rate at the end of 2021 ranging from 4% to 13% with a central tendency of around 7%.
The committee’s consensus outlook for consumer spending is a steep contraction in the first half of 2020 before a recovery begins in the second half to an overall decline of 7.3% for the year. Nonetheless, historically low interest rates are expected to spur sales of automobiles and homes. The group forecasts auto and light truck sales to fall from 16.9 million vehicles last year to 13.2 million this year then rise to 15.8 million in 2021. With the national average 30-year fixed mortgage rate projected to hold at 3.2% through next year, home sales are expected to mostly recover in the second half of this year, with home prices forecast to rise 2.0% nationally over the year.
On the business side, the EAC consensus is that firms will let inventories run down through year-end, then rebuild gradually next year. Capital investment is predicted to fall 11.7% for the year then grow 6.1% in 2021, with investment in information technology leading the recovery.
“Businesses will be in a ‘wait and see’ mode, trailing the consumer,” said Mann. “Firms won’t build inventories until they see sustained evidence that their goods will sell – and they will hold off on investments in productive capacity even longer.”
The group expects international trade will continue to face significant challenges. While weak domestic demand is restraining purchases of foreign goods, even weaker foreign demand is expected to cut exports. The committee sees a slow recovery abroad, with global trade contracting sharply this year. Developing economies with less capacity to provide stimulus have been particularly hard hit. Further, global supply chains have been disrupted. In response, and facing severe economic hardship, nations are turning inward, trending toward economic nationalism and trade protection.
U.S. regional performance in the second-half turnaround is expected to reflect patchwork reopening. Areas where the COVID-19 pandemic has had less effect, or is receding, are withdrawing business limitations, which may mean faster recovery – short of a viral resurgence. Cutbacks in global oil production have curtailed supply and stabilized oil and gas prices, such that regions more dependent on the oil sector have been spared even further deterioration. Tourism dependent regions have also suffered greatly.
Fiscal and monetary policy have countered the downturn to some degree. The federal deficit is expected to balloon from $984 billion in fiscal year 2019 to nearly $4 trillion in 2020. Monetary easing entailed lowering policy interest rates to zero percent, with further support from a variety of asset purchase programs. Going forward, the committee anticipates both Congress and the Federal Reserve will likely wait to gauge the effectiveness of their current efforts before engaging further.
With inflation all but non-existent in current measures – though difficult to judge with relatively minimal commerce – the bank economists see the federal funds rate staying effectively at zero for the foreseeable future. Consequently, interest rates on all maturities of Treasury securities are projected to rise minimally, if at all, this year.
The members of the 2020 ABA Economic Advisory Committee are:
- EAC Chair Catherine L. Mann, managing director and global chief economist, Citi, New York;
- Scott Anderson, EVP and chief economist, Bank of the West/BNP Paribas, San Francisco;
- Scott J. Brown, SVP and chief economist, Raymond James Financial, St. Petersburg, Fla.;
- Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
- Richard DeKaser, EVP and chief corporate economist, Wells Fargo & Co., Washington, D.C.;
- Robert Dye, SVP and chief economist, Comerica Bank, Dallas;
- Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
- Ethan Harris, head of global economics research, B of A Securities, New York;
- Peter Hooper, global head of economic research, Deutsche Bank Securities Inc., New York;
- Nathaniel Karp, EVP and chief economist, BBVA USA, Inc., The Woodlands, Texas;
- Bruce Kasman, chief economist and global head of economic research, JPMorgan Chase & Co., New York;
- Christopher Low, chief economist, First Horizon National Corp’s FTN Financial, New York;
- George Mokrzan, director of economics, Huntington Bancshares, Inc., Columbus, Ohio;
- Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Alabama;
- Doug Porter, chief economist and managing director, BMO Financial Group, Toronto;
- Carl Tannenbaum, chief economist, The Northern Trust Company, Chicago; and
- Ellen Zentner, chief U.S economist, Morgan Stanley, New York.