How Social Distancing Shut Down US Economics

Social Distancing Measures Have Shut Down Normal Life

This just in from the Goldman Sachs US Economics Team:

Over the last weeks the social distancing measures taken have shut down normal life in much of the US.

News reports point to a sudden surge in layoffs and a collapse in spending, both historic in size and speed, as well as shutdowns of many schools, stores, offices, manufacturing plants, and construction sites. These developments argue for a much sharper drop in GDP in Q1 and Q2. 

We expect declines in services consumption, manufacturing activity, and building investment to lower the level of GDP in April by nearly 10%, a drag that we expect to fade only gradually in later months.

We now forecast quarter-on-quarter annualized growth rates of -6% in Q1, -24% in Q2, +12% in Q3, and +10% in Q4, leaving full-year growth at -3.8% on an annual average basis and -3.1% on a Q4/Q4 basis.

These downgrades to our growth forecasts imply a large upward revision to our unemployment rate forecast. 

Using three approaches—the empirical relationship between GDP and unemployment, the experience of Hurricane Katrina, and a bottom-up analysis of likely job losses by sector and occupation— we estimate a 5.5pp increase in the U3 unemployment rate to a 9% peak in coming quarters.

However, we have more confidence that a large increase will be apparent in the U5 rate—which includes individuals who want a job but aren’t actively looking—than in the standard U3 rate.

Excerpt from Shelly Palmer
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