E We Are Trapped In A Phase Of Major Unknowns

The US Economy

We have known for some time now that the US GDP contracted at a massive 5% annual rate in the first quarter of 2020.

Bear in mind that the coronavirus impact on the economy was only starting to be felt in March, so the Q1 figure does not fully represent the bottoming of the US economy. 

Nonetheless, as the chart below indicates, the 5% annualized drop in GDP in Q1 was the sharpest contraction since the 8.4% GDP decline in the fourth quarter of 2008. Recall that the 2008-09 recession was associated with the worst economic and financial meltdown since the 1930s. The current economic decline obviously has come much more rapidly. 

Given the timing of the lockdowns and the responses to the virus, the second quarter decline in US GDP must be much steeper than the decline in Q1. 

Nonetheless, it is reasonable to expect that the US economy will rebound in the second half of the year as the lockdowns eases back. 

The consensus and even the financial markets fully expect a rebound in the US economy in the second half of 2020.

 For example, the Congressional Budget Office is predicting a 21.5% real GDP growth rate in the third quarter (July through September), followed by a 10.4% gain in the fourth quarter.

How rapid the rebound will be over the next couple of quarters, and its long-lasting nature, is the subject of incredible uncertainty. 

Larry Kudlow, the president’s chief economics adviser, is convinced, or so he says, that it will be a sharp v shaped economic rebound followed by a quick return to normalcy.

This thinking is clearly wrong and is based on unrealistic expectations both on the discovery of a credible virus and the ability of the US economy to recover quickly and easily from its economic trauma. 

Clearly the shape of the recovery depends on the success or lack of success that the US has in curbing the virus. 

And even with the current massive injection of federal funds to support the economy, there is no way that government funding can compensate for the fall off in spending in the private and household sectors. Moreover, confidence in both the corporate and household sectors will be hard to recover. 

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Arthur Donner 3 months ago Author's comment

I beg to differ. The risk we face is deflation, not inflation.

William K. 3 months ago Member's comment

Certainly all of the markets will take a lot to recover, and the fed pumping lots of money in can not help but fuel inflation, which is the enemy of value.

It does not matter how good the intentions are, making the wrong moves will cause damage. And printing money by the train[load is certainly a wrong move for most folks.

Diluting the value of what wealth I have works to destroy the value of what each dollar can purchase, and thus it does not deliver any benefit to me. Why is that so hard for some to see??? Runaway inflation does not benefit most people at all, quite the opposite.