Sunny Third-Quarter Economic Outlook Turns Cloudier
Confidence is waning in economic improvement as the Covid-19
situation worsens in several states.
situation worsens in several states.
By Mohamed A. El-Erian
Storm clouds are rolling in.
Storm clouds are rolling in. Photographer: Guillaume
Souvant/AFP/Getty Images
Souvant/AFP/Getty Images
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is
the chief economic adviser at Allianz SE, the parent company of Pimco, where he
served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge,
senior adviser at Gramercy and professor of practice at Wharton. His books
include "The Only Game in Town" and "When Markets Collide."
the chief economic adviser at Allianz SE, the parent company of Pimco, where he
served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge,
senior adviser at Gramercy and professor of practice at Wharton. His books
include "The Only Game in Town" and "When Markets Collide."
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A few weeks ago, the expectation was that the onset of the
third quarter would mark the close of a highly damaging and uncertain second
quarter for the U.S. economy and, importantly, herald a sharp and durable
reversal. Instead, with health concerns forcing a growing number of states to
either stop or reverse their reopenings, and with some businesses and
households withdrawing from active economic re-engagements, a cloud is now
forming over the third quarter, threatening the depth and breadth of the
economic recovery.
third quarter would mark the close of a highly damaging and uncertain second
quarter for the U.S. economy and, importantly, herald a sharp and durable
reversal. Instead, with health concerns forcing a growing number of states to
either stop or reverse their reopenings, and with some businesses and
households withdrawing from active economic re-engagements, a cloud is now
forming over the third quarter, threatening the depth and breadth of the
economic recovery.
With an initial phase of seemingly healthy reopenings, and
with government relief measures in full force, high-frequency indicators of
economic well-being (household confidence, new jobs and retail sales) started
improving in May or deteriorated at a slower rate (jobless claims). Such absolute
and relative improvements were countering what was shaping up to be a brutal
set of economic data for the second quarter as a whole, including the largest
contraction in gross domestic product on record. But with a continuing uptick
in economic data that repeatedly beat consensus expectations, the thinking was
the hit to this year’s GDP could be contained to 5% to 8%, with the prospects
of recovering the entire loss of output in 2021.
with government relief measures in full force, high-frequency indicators of
economic well-being (household confidence, new jobs and retail sales) started
improving in May or deteriorated at a slower rate (jobless claims). Such absolute
and relative improvements were countering what was shaping up to be a brutal
set of economic data for the second quarter as a whole, including the largest
contraction in gross domestic product on record. But with a continuing uptick
in economic data that repeatedly beat consensus expectations, the thinking was
the hit to this year’s GDP could be contained to 5% to 8%, with the prospects
of recovering the entire loss of output in 2021.
Since then, however, confidence in improving high-frequency
data has been dented by indications that the “R-naught” of Covid-19 — the
average number of people who catch the virus from a single infected person —
has increased above 1 once again in a majority of states. Even though
hospitalizations and deaths have not surged at the same rate as the sharp
increase in positive cases because of the much lower average age of the newly
infected, there is little confidence that this will continue given the material
risk of younger people, especially those who are asymptomatic, turning into
super-spreaders — a concern accentuated by evidence that this group has shown
little inclination to modify its behavior yet.
Policy makers are reacting, including either halting or reversing
economic reopenings in about 40 states, according to Goldman Sachs, but many
health experts view the cumulative response by local, state and federal
officials as too incremental and overly hesitant.
data has been dented by indications that the “R-naught” of Covid-19 — the
average number of people who catch the virus from a single infected person —
has increased above 1 once again in a majority of states. Even though
hospitalizations and deaths have not surged at the same rate as the sharp
increase in positive cases because of the much lower average age of the newly
infected, there is little confidence that this will continue given the material
risk of younger people, especially those who are asymptomatic, turning into
super-spreaders — a concern accentuated by evidence that this group has shown
little inclination to modify its behavior yet.
Policy makers are reacting, including either halting or reversing
economic reopenings in about 40 states, according to Goldman Sachs, but many
health experts view the cumulative response by local, state and federal
officials as too incremental and overly hesitant.
Consistent with these developments, the highest-frequency
indicators of household economic
activity, such as mobility and restaurant bookings, have already flattened or
started to head back down in a growing number of states. Some businesses, such
as Apple, have decided to reclose stores in certain places. And this process
has been accelerated in recent days with some states and cities closing bars
and barring in-restaurant dining.
indicators of household economic
activity, such as mobility and restaurant bookings, have already flattened or
started to head back down in a growing number of states. Some businesses, such
as Apple, have decided to reclose stores in certain places. And this process
has been accelerated in recent days with some states and cities closing bars
and barring in-restaurant dining.
Over the next few weeks, this will lead economists and Wall
Street analysts to revise down growth projections for the third quarter and to
push out the process of recovery. Both will be less consistent with a sharp and
lasting V-shaped recovery and more likely will align with my previous
characterization of a square-root-shaped recovery. And with certain relief
measures scheduled to sunset soon, including the Paycheck Protection Program
and the supplementary unemployment benefits, the U.S. economy would be exposed
to a bigger risk of short-term problems becoming structurally embedded. This would include a significantly larger
number of corporate bankruptcies and greater risk of long-term unemployment in
which jobless workers run a high risk of becoming unemployable.
Street analysts to revise down growth projections for the third quarter and to
push out the process of recovery. Both will be less consistent with a sharp and
lasting V-shaped recovery and more likely will align with my previous
characterization of a square-root-shaped recovery. And with certain relief
measures scheduled to sunset soon, including the Paycheck Protection Program
and the supplementary unemployment benefits, the U.S. economy would be exposed
to a bigger risk of short-term problems becoming structurally embedded. This would include a significantly larger
number of corporate bankruptcies and greater risk of long-term unemployment in
which jobless workers run a high risk of becoming unemployable.
Absent any policy and behavioral changes, the overall impact
of these measures would most likely be an overall GDP contraction for 2020
in the 8% to 12% range, assuming no second round of infections in improving
states such as New York. Moreover, the recovery of lost output would not be
completed in 2021. And the uncertainty surrounding these predictions would
notably increase, with the balance of risk tilted to the downside.
of these measures would most likely be an overall GDP contraction for 2020
in the 8% to 12% range, assuming no second round of infections in improving
states such as New York. Moreover, the recovery of lost output would not be
completed in 2021. And the uncertainty surrounding these predictions would
notably increase, with the balance of risk tilted to the downside.
Such a diminished outlook would worsen the
already-concerning inequality trifecta of income, wealth and opportunity
at a time of greater recognition and heightened sensitivity to long-standing
social injustices. It would also undermine the type of synchronized global
recovery in which external demand reinforces domestic economic
improvements. It would increase the likelihood of more protectionism and
faster deglobalization. And it would risk pulling down longer-term
economic growth and prosperity.
already-concerning inequality trifecta of income, wealth and opportunity
at a time of greater recognition and heightened sensitivity to long-standing
social injustices. It would also undermine the type of synchronized global
recovery in which external demand reinforces domestic economic
improvements. It would increase the likelihood of more protectionism and
faster deglobalization. And it would risk pulling down longer-term
economic growth and prosperity.
The answer is not to roll back health measures aimed at
regaining control of what is a worrisome acceleration of infections. Rather, it
is to ensure changes in behavior and
policy that allow for healthier and sustainable economic reopenings
during this tricky period of living with Covid-19.
regaining control of what is a worrisome acceleration of infections. Rather, it
is to ensure changes in behavior and
policy that allow for healthier and sustainable economic reopenings
during this tricky period of living with Covid-19.
A necessary component of the answer is to combine policy
relief measures with greater emphasis on steps to reduce the risk of infection
and deal better with the ill, as well as to counter more quickly a post-virus
world of low productivity and high
household insecurity. But it is imperative the private sector joins in —
whether through individuals and companies better adopting health safeguards or
by working harder to protect the most vulnerable segments of the population.
relief measures with greater emphasis on steps to reduce the risk of infection
and deal better with the ill, as well as to counter more quickly a post-virus
world of low productivity and high
household insecurity. But it is imperative the private sector joins in —
whether through individuals and companies better adopting health safeguards or
by working harder to protect the most vulnerable segments of the population.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net
To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net
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