• Goldman Sachs updated its economic forecast, predicting the U.S. economy would shrink by more than a third in the second quarter
  • Goldman said the recovery in the third quarter will be gradual as both businesses and consumers adapt as infection rates ease
  • Initial unemployment claims this week could hit a record 5.5 million

Goldman Sachs predicted the U.S. economy will shrink at a 34% annualized rate in the second quarter as a result of the coronavirus pandemic, triggering mass unemployment. The investment banking giant earlier had predicted 24% shrinkage for the quarter.

The economists said, however, they expect a strong recovery in the third quarter, with gross domestic product expanding by 19%. For the year, Goldman said it expects to see a 6.2% shrinkage in GDP.

“While the uncertainty is substantial, we expect the lockdowns and social distancing to result in sharply lower new infections over the next month, and our baseline is that slower virus spread and adaptation by businesses and individuals should set the stage for a gradual recovery in output starting in May/June,” Goldman economist Jan Hatzius and his team wrote in the updated forecast.

“Our estimates imply that a bit more than half of the near-term output decline is made up by year-end,” they wrote.

The estimate comes as retailers are laying off millions of workers. Last week saw more than 3 million initial unemployment claims filed. The numbers are expected to swell this week, perhaps to a record 5.5 million. March unemployment statistics are due Friday but it was unclear how many of the recent layoffs would be reflected. February’s rate was 3.6%. Goldman said it expects layoffs to total 11 million in the first three weeks of data. The St. Louis Federal Reserve projected unemployment to increase dramatically, especially in the service sector.

The $2.2 trillion CARES Act signed into law Friday provides for extended unemployment benefits, adding $600 a week for 13 weeks and coverage for workers normally ineligible, including free lancers and the self-employed. It also provides for full pay for four months.

President Trump Sunday extended social distancing guidelines through the end of April. Medical authorities have said they do not expect COVID-19 infections to peak until some time between mid-April and mid-May, meaning the guidelines might have to continue longer.

Federal Reserve Chairman Jerome Powell has said the U.S. likely already is in recession, and the International Monetary Fund and World Bank have said the global recession is underway.

By Tuesday morning, the U.S. reported nearly 165,000 confirmed coronavirus infections with at least 3,173 deaths.