CBO says US economy and jobs will go way down. And it'll be a long road back

This afternoon, the Congressional Budget Office released its first projections on the economy and the US budget deficit since the COVID 19 pandemic shut down large amounts of activity. And as you’d imagine, April through June will have a historic decline with interest rates staying at rock bottom.

Inflation-adjusted gross domestic product (real GDP) is expected to decline by about 12 percent during the second quarter, equivalent to a decline at an annual rate of 40 percent for that quarter.

The unemployment rate is expected to average close to 14 percent during the second quarter.

Interest rates on 3-month Treasury bills and 10-year Treasury notes are expected to average 0.1 percent and 0.6 percent, respectively, during that quarter.

We knew it was historically awful now, but what makes the CBO report more newsworthy and alarming is the fact that it does not expect us to come close to bouncing back to pre-pandemic levels over the next TWO years.

Output. After a sharp contraction in the second quarter, economic growth is expected to average about 17 percent at an annual rate in the second half of calendar year 2020. (For the quarterly pattern of changes in GDP, see the table below.) Increases in consumer spending are expected to more than offset further declines in business investment during that period. In 2021, real GDP is projected to grow by 2.8 percent, on a fourth-quarter-to-fourth-quarter basis. Under that projection, real GDP at the end of 2021 would be 6.7 percent below what CBO projected for that quarter in its economic outlook produced in January 2020.

And look at that unemployment figure, at 11.7% at the end of 2020, and having an annual unemployment rate in the double digits in 2021.

The labor market is expected to improve after the third quarter, with a rebound in hiring and a significant reduction in furloughs as the degree of social distancing diminishes—leading to an increase in business activity and an increase in the demand for workers. In particular, the unemployment rate is projected to decline to 9.5 percent by the end of 2021. Under that projection, the unemployment rate at the end of 2021 would be about 6 percentage points higher than the rate in CBO’s economic projection produced in January 2020, and the labor force would have about 6 million fewer people.

This is what I have worried about since the layoffs started – once the downturn starts and the jobs are gone, people are not going to hired back quickly no matter how much the economy reopens.

We’ve seen that happen with each of the last two recessions, where it took longer and longer to regain the jobs lost as businesses took productivity gains and profits, and only added staff as a last resort. As this chart shows, it took 4 years for us to get back to the jobs totals of February 2001, and it took more than 6 years to get back to the employment levels of January 2008.

The consumer sector looks lousy as well, as a lot of people aren’t going to be willing to spend as much in many entertainment areas and other leisure sectors. This is partly due to their own social distancing concerns, and partly due to the fact that a lot of them will have less money in their pockets due to the awful employment situation.

With the lack of work and the massive amount of bailouts happening, this will blow our already-huge budget deficit into areas well beyond what we saw at the depths of the Great Recession.

As a result of recent events and legislation, deficits are projected to be significantly larger in 2020 and 2021 than in 2019, with sharply lower revenues and substantially higher noninterest spending. Even with increased federal borrowing, declines in interest rates mean that net interest outlays will decline. Overall, if laws currently in place governing spending and revenues generally remained unchanged and no significant additional emergency funding was provided, the federal deficit would be roughly $3.7 trillion in fiscal year 2020 and $2.1 trillion next year, CBO estimates. In CBO’s March baseline projections, deficits were just over $1 trillion in each of those years.

You’ll notice that the CBO says the projected deficit would be even higher, except that the cost to service our debts will be lower than we thought at the start of this year. That’s because the Federal Reserve has had significant rate cuts in recent months, and the CBO anticipates that rates will stay low for a while.

Interest Rates. Interest rates on Treasury securities are expected to remain quite low through 2021, largely as a result of continued weakness in economic activity, actions taken by the Federal Reserve in response to that weakness, and an increase in demand for low-risk assets among financial market participants. Those factors are expected to more than offset upward pressure on rates from greater federal borrowing. The interest rate on 3-month Treasury bills is expected to remain near 0.1 percent, whereas the interest rate on 10-year Treasury notes is expected to rise gradually from its current level of 0.6 percent, averaging 0.7 percent in 2021. Under that projection, the interest rate on 10-year Treasury notes at the end of 2021 would be roughly 1.6 percentage points lower than the rate in CBO’s economic projection produced in January 2020.

We need to recognize that the damage to our public health and economy that started with the COVID-19 outbreak is going to linger for a long time, and we need to adjust our thinking and policies accordingly. The high unemployment rates likely mean a lot more social spending for stabilization and possibly public works to replace the lack of hiring by the private sector. And given the projection of low interest rates and a lack of inflation, getting people back to work and having people continue to spend money needs to be the top priority over what the size of the budget deficit is going to be.

Although if you want to lower the deficit, I can think of a lot of GOP Tax Scams and bailouts from DC that benefitted corporations and the ultra-rich that could be done away with. And increasing those corporate rates while giving assistance and incentives on payroll expenses might help change the trend of choosing profit over personnel. Just saying.