April 22, 2020 – Second Quarter 2020 Economic Forecast Update
By George W. Hammond, Ph.D., director and research professor, EBRC
As with the March Interim forecast, there is still a huge amount of uncertainty about the future of the outbreak and the economic impacts associated with it. Regarding the outbreak, the question at this point is when government and self-imposed social distancing will ease. The April 2020 U.S. forecast from IHS Markit, which underpins the Arizona forecasts, assumes that social distancing begins to ease in the July-August period.
The epidemiological uncertainties create economic uncertainties. We are on track for a major downturn, the question is how bad and for how long. This forecast update is the second step in assessing the damage and the recovery. It projects a much more significant adverse shock to the state economy than the March Interim. As more hard data is released in coming months, we will know more about the economic impacts and the prospects for recovery.
For the April U.S. and Arizona forecasts, the baseline projections are assigned a 45% probability. The pessimistic scenario has a 35% probability and the optimistic scenario has a 20% probability. I view the baseline and pessimistic scenarios as being about equally likely.
Arizona Outlook
The national forecast, summarized below, is combined with my assumptions about the impact of industry shutdowns on employment and retail sales. I assume massive reductions in employment in leisure and hospitality and retail trade and significant shutdowns in personal services and health care, during the second quarter of 2020, driven by the government- and self-imposed social distancing measures.
To give you a sense of the estimated shutdown impact, employment in leisure and hospitality is assumed to drop from 335,000 in the fourth quarter of 2019 to 91,000 in the second quarter of 2020. Trade, transportation, and utilities jobs drop from 546,000 in the last quarter of 2019 to 405,000 in the second quarter. Health care and social services jobs decline by 16,000 jobs as dentists, doctors, and physical therapists avoid non-emergency interactions with patients and clients. Personal services decline by 11,000 to reflect the shutdown by barbers, hair, and nail salons.
Taxable sales at retail establishments and restaurants and bars also experience a huge decline in the second quarter.
The current baseline projections put the magnitude of the coming downturn at about 50% greater than the 2008-2009 recession but shorter in duration. Under current assumptions, it is a short, sharp shock. Total nonfarm employment in Arizona declines by 481,000 from the first quarter to the third quarter of 2020. That translates into a peak-to-trough decline of 16.2%. For comparison, Arizona lost 305,000 jobs from peak to trough (quarterly) during the Great Recession. That was an 11.4% drop.
On an annual average basis, the forecast calls for state jobs to drop by 10.2% this year from 2019. That falls below the peak-to-trough decline, because the downturn begins and ends in 2020.
The state unemployment rate surges to 19.0% by the fourth quarter of 2020, but then drops rapidly.
Taxable retail sales decline this year, as job, income, and wealth declines take a toll on consumers. Sales at restaurants and bars gets hit harder, given the additional headwind from social distancing.
Population growth slows, with reduced net migration, and that generates lower levels of housing permit activity.
Once we get past the shock this year, the recovery should be solid. Arizona was in very good shape before the outbreak and once the outbreak is under control, growth will accelerate significantly.
Growth rates will look very good initially, because we’re restarting large sectors of the economy. The forecast calls for the level of employment to return to its fourth quarter 2019 level by the end of 2022.
The pessimistic scenario assumes a deeper, more prolonged downturn. Arizona jobs decline by 695,000 from the last quarter of 2019 to the third quarter of 2020. That translates into a 23.4% drop.
The state unemployment rate peaks at 22.3% in the fourth quarter of 2020, then gradually declines.
Under the pessimistic scenario, it takes longer for the state to return to pre-outbreak levels. Jobs return to their late 2019 level in the first quarter of 2025, five years from now.
National Outlook
IHS Markit now assumes that the rate of new coronavirus cases will be dwindling by this August, which implies that we will see the gradual lifting of government and self-imposed quarantines begin around that time.
The forecast calls for a very severe economic downturn. It begins with a substantial 3.5% annualized real GDP decline in the first quarter of 2020, followed by a giant 26.5% drop in the second quarter. The recession concludes in the third quarter with a drop of 0.4%.
The unemployment rate rises to a peak of 10.3% by the end of 2020. The shape of the recovery is expected to look like the Nike-swoosh: a large drop followed by a gradual recovery. Keep in mind that this refers to the level of economic activity. Rapid growth rates return quickly, but real GDP does not return to its previous peak until the third quarter of 2021.
The monetary policy response is assumed to be very accommodative, with the federal funds rate near zero for the foreseeable future.
The federal fiscal policy response in the forecast includes the CARES Act. It cushions the blow modestly.
Compared to the March 20 interim projections, IHS Markit has downgraded performance during the first three quarters of 2020. The peak-to-trough decline has been increased from 3.8% to 8.3%. For perspective, the peak-to-trough decline during the six quarter long Great Recession was 4.0%.
The April forecast calls for a 5.4% decline in real GDP on average in 2020, followed by a 6.3% increase in 2021. Thus, the big decline this year is followed by a strong rebound from very low levels of activity. Keep in mind that the annual average decline is much less than the peak-to-trough drop because the downturn begins and ends in 2020.
Real personal consumption expenditures drop by 5.5% this year and then recover with 7.2% growth in 2021. The drop in household spending is driven by social distancing, the massive wealth decline as stock prices drop, and now job and income losses caused by government-imposed business closures. Consumer confidence suffers a major setback.
Some spending categories are hit harder than others, with travel-and-tourism-related sectors suffering the biggest hits. These sectors include transportation, entertainment, gambling, lodging, food away from home and travel. Real consumer spending for accommodation and food services fall by between 61.0% and 62.0% from the fourth quarter of 2019 to the second quarter of this year. Recreation spending falls by 40.4%. Public transportation expenditures drop by 12.8%.
Other major components of consumer spending are affected as well. In particular unit sales of light vehicles are projected to decline by 40.2% from the last quarter of 2019 to the second quarter of 2020.
The most recent economic forecast data for Arizona, Phoenix metro and Tucson metro.
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