• Analysts warn of millions of job losses in the U.S.
  • Experts believe US GDP will drastically contract in Q2
  • Complicating economic projections is uncertainty of fiscal, monetary programs

The coronavirus epidemic is an unprecedented phenomenon that has left some financial experts stunned and perplexed, while leading others to predict doomsday scenarios for the U.S. economy

While the White House and Federal Reserve have proposed various stimulus programs to mitigate the economic impact of the virus, some market observers remain pessimistic and unimpressed.

David Kostin, chief U.S. equity strategist at Goldman Sachs, warned: “If short-term shutdowns lead to business defaults, closures, and permanent layoffs, the damage to corporate earnings growth could persist well after the virus is contained,”

Paul Hickey, cofounder of Bespoke Investment Group said the recent actions by the Fed will not be sufficient to save the economy.

“While the Fed’s actions are an enormous help, the only way the markets are going to find sustainable improvement is when the economy is allowed to come back to life, or at least there is a real path in place for how that is going to happen,” he said.

As such, many experts see drastic deterioration in the U.S. economy over the next few months.

Economists at Goldman Sachs said they expect the U.S. gross domestic product to shrink by an incredible 24% in the second quarter of this year, after a 6% drop in the first quarter.

However, the Goldman economists still expect the economy to rebound in the third quarter, at a 12% clip, with unemployment peaking at 9%. On the whole, they expect full year GDP to shrink by 3.8%.

“Over the last few days social distancing measures have shut down normal life in much of the U.S. 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,” the Goldman economists said. “These developments argue for a much sharper drop in GDP in [the first and second quarters].”

Indeed, some of the largest states in the country, including California and New York (total population of 60 million) have essentially ordered residents to stay at home and shut down many businesses, while millions of others have temporarily lost their jobs.

Morgan Stanley economist Ellen Zentner is even more negative – she expects the U.S. economy to crater by 30% in the second quarter, leading to a jump in the unemployment rate to 12.8%.

"Economic activity has come to a near standstill in March. As social distancing measures increase in a greater number of areas and as financial conditions tighten further, the negative effects on near-term GDP growth become that much greater," Zentner wrote.

Morgan Stanley expects personal consumption expenditures to fall by 31% as consumers scale back on travel, dining and other services.

"As we move into April, it will be both a surge in layoffs as well as a shutdown in hiring that will bring about the darkest days for the labor market since the financial crisis," said Zentner.

By May, Morgan Stanley expects the U.S. economy will lose nearly 17 million jobs from the peak in February.

"The evolution of the unemployment rate ultimately will be determined by how well fiscal stimulus is able to support small businesses, how quickly economic activity normalizes, and how attached to the labor market unemployed workers remain," Zentner wrote.

But Morgan Stanley expects consumption will return to pre-virus levels and the economy will rebound in the third quarter. That will eventually lead to a 3.3% annual growth rate in 2021.

Marc Chaikin, CEO of Chaikin Analytics, similarly warned: “Things will get worse before they get better and the markets will continue to reflect that reality. This means that a bottoming process will take more time and probably inflict more damage to equities.”

Bank of America also took a grave view of the situation.

“We believe that the U.S. economy has fallen into recession, joining the rest of the world, and it is a deep plunge,” U.S. economists led by Michelle Meyer wrote. “Jobs will be lost, wealth will be destroyed and confidence depressed. The salvation will come if there is a targeted and aggressive policy response to offset the loss of economic activity and ensure a sound financial system... There is a large uncertainty band around the forecasts.”

Bank of America thinks that economy will “collapse” in the second quarter, shrinking by 12%, while full year GDP will contract by 0.8%.

Bank of America also expects the unemployment rate to nearly double, with about 1 million jobs lost each month of the second quarter for a total of 3.5 million losses.

Meyer projected a bottoming out in April, followed by a “very slow return to growth thereafter with the economy feeling somewhat more normal by July.”

“Although the decline is severe, we believe it will be fairly short lived,” Meyer added.

Meyer is counting on action by the government.

“When it comes to the policy response, there should be no upper bound for the size of stimulus, in our view,” she said.

James Bullard, president of the Federal Reserve Bank of St. Louis, said the unemployment rate could spike to 30% in the second quarter, largely due to closures of retail stores and other businesses. He also said the GDP could plunge by as much as 50% in the second quarter.

"Millions of people are going to lose their jobs," Minneapolis Fed president Neel Kashkari said on the TV news program "60 Minutes."

Small businesses are especially at risk.

"You have all these small- and medium-sized businesses which will be under extreme stress and forced to shut down, and we don’t have a benchmark for how to recapitalize them or to keep them in business," warned Matt Luzzetti, chief U.S. economist at Deutsche Bank Securities.

Pantheon Macroeconomics’ Ian Shepherdson said he could only make an educated guess on the imminent carnage.

“We now guesstimate that second quarter GDP will drop at a 10% annualized rate, after a 2% fall in [the first quarter],” he said. “We are penciling in a 20% plunge in discretionary consumers' spending in the second quarter, enough alone to subtract some eight percentage points from GDP growth.”

The problem is that economists and analysts have entered uncharted waters, compounded by the fact that monetary and fiscal policy decisions in the U.S. are still not completed.

“Economic data in the near future will be not just bad, but unrecognizable,” said Credit Suisse economists led by James Sweeney. “Anomalies will be ubiquitous and old statistical relationships within economic data or between market and macro data might not always hold... There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming.”

Some analysts reiterated their expectations of an avalanche of job losses – counted in the millions.

Bank of America predicted that 3 million people have already filed for state unemployment insurance.

Prior to 2020, the worst month for job losses was 800,00 in March 2009 during the bleakest days of the financial crisis. Now, some analysts are forecasting that anywhere from 500,000 to 5 million jobs may be shed in only a month.

“There’s just so much that we don’t know about how long the disruption to economic activity related to the containment of the virus will be. That does make forecasting these things very difficult,” said Jeremy Lawson, chief economist at Aberdeen Standard Investments. “By the time you get to the April payroll number, which may be right at the deepest level of contraction, yes, those numbers [from 500,000 to millions of job cuts] are plausible certainly.”

Shepherdson thinks that up to 5 million jobs may potentially vanish in April.

“We never imagined we’d write anything like this,” Sheperdson said. “The shock will be so great that it will leave policymakers with no choice but to pass much more stimulus than is currently under discussion.”

Steven Blitz, chief U.S. economist at TS Lombard, predicted the unemployment rate will reach 10.6% later this spring, or about 17.9 million Americans unemployed, an increase of 12 million from February.

“If there is not a normalization of activity by mid-April, which looks increasingly unlikely, we would not be surprised to see job losses in the multi-millions next month,” said Citigroup economist Veronica Clark.

Josh Bivens, director of research at the Economic Policy Institute, wrote: “Even with moderate fiscal stimulus, we’re likely to see 3 million jobs lost by summertime. Keeping this number down and allowing any job loss to be quickly recouped after the crisis ends should spur policymakers to act.”