The Congressional Budget Office recently revised its forecast of key economic variables that drive the agency’s projections of federal spending and revenues. As the U.S. economy shuddered to a virtual halt in March in response to the global health pandemic, it became clear that CBO’s preliminary forecasts – published in January 2020 – were outdated. The new interim projections reflect a generally accepted viewpoint that dismal second quarter 2020 results will be followed by significant improvements in the third and fourth quarters, as regional economies phase in business re-openings.
The timing of this predicted rebound will coincide with election season, which will lead many lawmakers, including the Trump administration, to claim “mission accomplished.” Taken out of context, a 21 percent annualized increase in real GDP would indeed be a phenomenal accomplishment, especially when shell-shocked voters are accustomed to lackluster 2 percent growth in the best of times and Great Depression era declines in the worst. But this rebound will belie a sad truth, that the coronavirus has imposed losses that will take years to erase.
In a June 1 letter to Senate Minority Leader Chuck Schumer (D-NY), CBO Director Phil Swagel reveals that the revised 10-year forecast of real GDP will be $7.9 trillion lower than originally expected, and that while the latter half of 2020 will improve, the U.S economy isn’t expected to regain its pre-pandemic level of real GDP until the first quarter of 2023. In fact, CBO predicts it will take an entire decade to erase the losses imposed by the pandemic.
Stock market investors sometimes invoke the term “dead cat bounce” to describe a temporary stock market rally in the midst of a bear market decline. Similarly, Americans should avoid excess exuberance over improving economic data in the runup to the election. Double digit economic growth on a dramatically shrunken base is an improvement, but the U.S. economy will still have a long road ahead to recapture the living standards it lost.