University of Michigan economists see second quarter recession

University of Michigan economists see second quarter recession
Patrick Anderson, CEO of Anderson Economic Group

Editor’s note: As a service to our community, MiBiz’s coronavirus coverage is available free to all website visitors. We encourage you to support our journalists by subscribing to our website

Also, sign up for our new free daily e-newsletter, MiBiz Morning Edition, for the latest West Michigan business news, scoops and information only available on MiBiz.com.

University of Michigan economists expect the coronavirus and COVID-19 pandemic to drive the U.S. economy into recession for the second quarter.

In an updated outlook issued Thursday, economists with University of Michigan’s Research Seminar in Quantitative Economics offered two scenarios on the impact of the pandemic that has caused substantial “economic disruption” since a prior forecast in February. The outlook “assumed that the pandemic would be contained in the United States with relatively limited disruption to the real economy.”

Economists emphasized that in either scenario, U.S. economic performance remains “difficult to characterize in terms of likelihood. There is very limited economic information available, and the epidemiological situation is still evolving quickly.”

“Although as recently as the past week, we thought there was a reasonable chance that the U.S. economy could avoid a recession, we now expect an official recession to be declared in both of the scenarios we considered,” according to the updated outlook. “If events unfold in a more positive direction than we currently foresee and the economy does manage to avoid a recession, we will be delighted to be mistaken in our recession call.”

In one of the scenarios outlined in the updated outlook, University of Michigan “assumes that the mitigation measures that have been taken to date are effective at slowing the spread of the disease relatively quickly, resulting in a sharp but short-lived contraction in economic activity,” economists wrote.

The other “prolonged” scenario assumes “the mitigation measures taken so far prove insufficient in the near term, resulting in severe financial stress and a larger and more prolonged contraction in economic activity.”

Under the prolonged scenario, University of Michigan economists see Real GDP in the U.S. declining 12 percent in the second quarter, followed by another 1.5 percent decline in the third, and a return to growth in the fourth quarter.

They project Real GDP to fall 5 percent in the second quarter under the “effective mitigation” scenario and return to growth in the third quarter.

For the whole year, the University of Michigan projects the prolonged scenario to result in a 1.5-percent decline in Real GDP for 2020. The effective mitigation scenario would result in Real GDP growth of 0.5 percent for the year.

Sectors more affected by the pandemic — transportation, warehousing, accommodation and food services — could decline 20 percent or 50 percent under either scenario.

“Several other sectors, including retail trade, will also see substantial reductions in demand. A small number of sectors will add modestly to GDP, most notably healthcare services, drug purchases, and food consumption at home,” economists wrote in the updated outlook.

Both scenarios presume varying degrees of federal economic aid and stimulus. A “heftier policy response” in the prolonged scenario would include “large direct payments to households in the second and third quarters of 2020, large personal and corporate tax relief, a significant ramp-up in subsidies to private businesses most affected by the epidemic, and sizeable federal aid to states.”

For Michigan, the economists’ effective mitigation scenario projects payroll jobs to decline by about 155,000 from the first to third quarters of 2020. In the prolonged fallout scenario, the state loses 400,000 jobs.

The East Lansing-based Anderson Economic Group on Thursday offered a dire assessment, projecting that an “extremely large, and possibly unprecedented, number of workers losing significant income in a single month.”

In an analysis of the economic fallout from the pandemic, Anderson Economic Group estimated that 3.1 million people in Michigan and 104 million across the U.S. “will suffer significant lost income” through April.

The lost income will come from workers who are laid off, furloughed, put on sick leave, required to self-isolate or quarantine, unable to work due to illness or caring for family members, and people ordered not to work by their employers or the state, according to Anderson Economic Group.

The estimate “is not a worst-case scenario,” said Patrick Anderson, CEO of Anderson Economic Group.

“These estimates are conservative in that they do not presume the majority of workers will leave work for more than two days, for illness, family care, or disruption in their lives. The numbers could be much higher,” Anderson said.

Economists at Comerica Inc. as well on Thursday said a recession for the U.S. economy likely had already begun.

In a daily economic alert, Comerica projected “significant deterioration” in U.S. economic data for March and April.

“We expect to see a dramatic pullback in economic activity once the March and April metrics are available. The U.S. economy is in recession now. But we do not know all the parameters of the recession,” Comerica economists wrote. “The significant monetary policy actions by the Federal Reserve will help to keep financial markets functioning and to provide the right environment for an economic recovery, but they will not stop the brutal cessation of economic activity that we are now seeing.

“Large scale fiscal policy is needed and is on the way. Washington will not get all the policy measures right the first time. There will be more fiscal packages to follow the first round as problems are identified and solutions are fine tuned.”

PNC Bank earlier this week in an economic report wrote that “the likelihood of a full-blown recession, as opposed to a temporary contraction, is at least 50 percent right now.”

“It depends on a number of factors, many of them noneconomic: how long the current crisis lasts, how effective the government response is, and whether the health care system effectively deals with the COVID-19 outbreak. The longer the immediate crisis lasts, the greater the potential for a full-fledged US recession,” PNC economists wrote. “As more people lose their jobs, the more income will be lost, increasing the potential for consumer spending to fall even after the worst of the outbreak has passed. In addition, the loss of so much stock market wealth could be a drag on consumer spending once the immediate crisis is over.”