us economic outlook 29 2020/useconoutlook_0420.pdf• lay-offs, order cancellations, construction...

Confidential. © 2019 IHS Markit®. All Rights Reserved.© 2019 IHS Markit. All Rights Reserved.

US Economic Outlook COVID-19 plunges economy into uncharted waters

Rhode Island Economic Outlook Conference

April 29, 2020

James Bohnaker, Associate Director

+1 617 304 3594, [email protected]

mailto:[email protected]

Confidential. © 2019 IHS Markit®. All Rights Reserved.

Guidance on the COVID-19 virus spread from the IHS Markit Life Sciences team• The global peak of the virus is expected between May and August 2020.

• The virus will take different paths in different regions and countries.

• The virus will return across 2020–22, in local pockets of different countries.

• Treatments are in development and early data are coming in.

• By the fourth quarter of 2020, drugs could be made available to the most vulnerable but not the general public until more is known about side effects.

• Full approval could come in early 2021.

• Early clinical data on a vaccine should be available by August 2020.

• A vaccine might be available for compassionate use in autumn 2020.

• However, a general vaccine for a healthy population must be safe, implying a timeline closer to November 2021 at the earliest.

2


US economy enters a deep recession

• The US economic outlook has deteriorated sharply over the past month as the coronavirus disease 2019 (COVID-19) has spread and most states have mandated closures of nonessential businesses.

• Equity price declines, a widening of risk spreads, and widespread disruptions of activities indicate that consumer and business spending will be considerably weaker than previously forecast.

• The Federal Reserve (Fed) is expected to hold its federal funds rate near zero for several years.

• We assume the pandemic will subside in the third quarter. The biggest hit to US growth will come in the second quarter, when consumer spending plunges.

• The recession will result in a peak-to-trough decline in real GDP of 8.3% over the first three quarters of 2020.

• The forecast includes the new $2.3-trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which funds unemployment benefits, “recovery rebates” to individuals, business loans, and aid to state and local governments and hospitals. This will raise the federal deficit near $2 trillion this year and next.

3


COVID-19: Unprecedented shock to the US economy

4

• Consumer service sector is ground zero of economic impact– Transportation, restaurants & bars, amusement parks, museums, sporting events, casinos

– “At-risk” comprises ~6% of GDP, 10% of PCE, 14% of employment (> 20 mil. jobs)– We assume that the peak-to-trough decline in “at-risk” PCE approaching 75-100%

• Sharp decline in consumer expenditures is not limited to services– Non-essential retail (department, general merchandise, vehicles, other durables)

– Home sales and construction – Oil price decline will hammer oil patch: production declines and investment collapse

– Cascading effects as businesses pull back and trim variable costs• Lay-offs, order cancellations, construction projects on hold, cashflow squeeze, profit hits,

delinquencies, defaults, etc

• Continuing fixed costs require cash reserves or bridge loans … but who is lending?

• Small and medium sized businesses go under with insufficient equity and limited access to credit

• Silver lining: There are offsets– Increase in consumption of food (and toilet paper) at home; take-out & delivery– Increase in medical care (COVID-19 related) and supplies

– Home delivery services for other goods…

– …But supply chains not equipped for rapid response


Knock-on effects make a bad situation worse

5

• Multiplier effects – Laid off workers decrease non-essential spending

– Further reduces business revenues

– Orders get cancelled, more workers laid off…and around we go

• Financial market impact– Expected earnings decline; volatility and risk aversion increase; valuations decline

– Credit spreads widen à ratings downgrades à value of leveraged loans declines àdefaults & bankruptcies rise

– Wealth destruction impacts household and business balance sheets

– Rush to liquidity drives investor withdrawals; managers sell most liquid assets

• Uncertainty around the world– Strengthening dollar hurts emerging markets, weakening global growth

– Collapsing commodity prices (Saudi/Russia deal may help?)

– Inadequate healthcare systems and social infrastructure in much of developing world

– Inability to fund adequate fiscal policy responses spells a long road back

– Could reignite political and economic tensions in the Euro Zone

– Trade tensions with China, other geopolitical relationships could flare up

– And of course, it’s an election year


What needs to happen to “reopen” the economy?

6

• Everything hinges on the path of the disease– How effective will social distancing policies be at bending the curve?

• When is the peak in new cases/deaths?• When will new cases dwindle to near zero and allow lifting restrictions?

– How effective will “new” treatments prove to be?• Reduce severity of symptoms and load on the hospital system – a “bad flu”• Reduce mortality rate• Reduce fear

– What is the true degree of infections in the population?• More testing and antibody tests• How does herd immunity work?• When will vaccines be widely available?

– How do we “reopen” the economy? • Will this happen “en masse” across the country? • Will politics get in the way? • Does the private sector have the ability to set health guidelines? • How cautious will consumers be when the “all clear is sounded?• Game theory and Domino effect could define the timeline


When and how will consumers recover?

• How do you “reopen the economy”?

• The government can’t flip a switch to make businesses open or consumers buy things

• High unemployment, balance sheet destruction, health concerns, business closures will delay consumer rebound

• Some reticence on social gatherings for the remainder of this year

• Some good news

• Fiscal and monetary relief – money to households, UI expansion, SBA loan forgiveness, corporate bailouts, financial market stability

• Low gas prices, but will anyone want to travel?

• High savings and low debt burdens before this episode

• Pent-up demand for some segments of retail

• Will everything be different from now on?

• Probably not. The same trends that were already at play will likely accelerate.

• Increased demand for online experiences, retail store closures, PPE becomes the norm

• Longer term, urban density may lose its appeal; tailwinds for suburban homeownership?

7


“V-shaped” recovery is not a likely outcome

8


Consumer sentiment collapsed in March and April as job losses mounted

50

60

70

80

90

100

110

120

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

1966

= 1

00

University of Michigan Index of Consumer Sentiment

Source: University of Michigan, IHS Markit © 2020 IHS Markit

9


-6

-4

-2

0

2

4

6

8

1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030Perc

ent c

hang

e fro

m a

yea

r ear

lier

Real consumer spending Real disposable income

Stimulus will reinforce income but do little for consumer spendingReal consumer spending and disposable income

10

Source: IHS Markit © 2020 IHS Markit


Despite a hair-raising March, the biggest hit to nonfarm payrolls won’t appear in official data until April

-800

-600

-400

-200

0

200

400

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20

Thou

sand

s

Total payrolls added (left) Private payrolls added (left)

Change in nonfarm payrolls

11



Most of March job losses were in leisure and hospitality

12

-500 -400 -300 -200 -100 0 100

Leisure & hospitalityHealth care & social assistance

Professional and business servicesRetail trade

ConstructionOther servicesManufacturing

EducationState governmentMining & logging

Transportation & warehousingFinancial activities

UtilitiesWholesale trade

InformationLocal government

Federal government

Change in payroll employment, thousands



Every state will experience job losses in 2020

13

© 2020 IHS Markit. All rights reserved. Provided “as is”, without any warranty. This map is not to be reproduced or disseminated and is not to be used nor cited as evidence in connection with any territorial claim. IHS Markit is impartial and not an authority on international boundaries which might be subject to unresolved claims by multiple jurisdictions.

Employment growth, 2020 (fourth quarter over fourth quarter)

Source: IHS Markit


Industrial production is entering a steep downturn

14

-25

-20

-15

-10

-5

0

5

10

15

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Year

-on-

year

% c

hang

e

Industrial production Manufacturing production Real GDP

Industrial production and real GDP

US Economic Outlook | April 2020



US oil drilling follows crude oil prices

15

0

30

60

90

120

150

0.0

0.4

0.8

1.2

1.6

2.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Oil rigs (Left scale, thousands) WTI price (Right scale, USD/barrel)

Weekly oil rig count and West Texas Intermediate crude oil price


Sources: Baker Hughes and EIA © 2020 IHS Markit


Pump prices heading downward

16

1.8

2.0

2.2

2.4

2.6

2.8

3.0

Jan-2019 Apr-2019 Jul-2019 Oct-2019 Dec-2019 Mar-2020

$/ga

llon

Retail gasoline price, self-service including taxes, DOE all-grades



-60

-50

-40

-30

-20

-10

0

10

20

30

40

2007 2009 2011 2013 2015 2017 2019 2021 2023

Perc

ent c

hang

e, a

nnua

l rat

e

Baseline Pessimistic Optimistic

Real GDP growth in alternative scenarios

Real GDP growth in alternative scenarios

17



0

5

10

15

20

25

2007 2009 2011 2013 2015 2017 2019 2021 2023

Perc

ent

Baseline Pessimistic Optimistic

Unemployment rate alternative scenarios

Unemployment rate

18



Light-vehicle sales in alternative scenarios

19

3

6

9

12

15

18

2006 2008 2010 2012 2014 2016 2018 2020 2022

Mill

. of u

nits

, ann

ual r

ate

Baseline(45%) Pessimistic (35%) Optimistic (20%)

Light-vehicle sales




Housing starts in alternative scenarios

20

0.4

0.7

1.0

1.3

1.6

1.9

2.2

2006 2008 2010 2012 2014 2016 2018 2020 2022

Mill

. of u

nits

, ann

ual r

ate

Baseline (45%) Pessimistic (35%) Optimistic (20%)

Housing starts




Risks to the US forecast

Scenario CharacteristicsCOVID-19 causes an even larger, longer hit to production, employment, and income(Probability = 35%)

• It takes longer to bring the COVID-19 virus under control.• Consumer and business spending decline more sharply in the

second and third quarters.• The peak-to-trough decline in real GDP is 22.9% over the first three

quarters of 2020, compared with 8.3% in the baseline. • The unemployment rate peaks at 22.2% in the third quarter.

Faster V-shaped recovery from COVID-19 recession(Probability = 20%)

• The number of new COVID-19 cases peaks by mid-April and drops toward zero by June, allowing activity restrictions to ease.

• Discovery of an effective treatment leads to better health outcomes.• The US recession is milder than in the baseline, with real GDP

declining 4.1% peak to trough in the first two quarters of 2020.• Existing fiscal and monetary measures mitigate the damage to

household and corporate balance sheets, expediting recovery.

Baseline forecast(Probability = 45%)

• Real GDP contracts 8.3% over the first three quarters of 2020.• The CARES Act provides fiscal support.• The federal funds rate is held near zero through 2025. The Fed

pursues aggressive quantitative easing and liquidity measures. • Core inflation is mild initially, then rises to 2% in 2022.

21

us economic outlook 29 2020/useconoutlook_0420.pdf• lay-offs, order cancellations, construction...

Documents