A year from now the United States may have emerged from the economic hole dug during the pandemic with growth smartly above its previous trend and output largely recovered.
Or – it may be struggling to patch a remaining $2 trillion gash to the gross domestic product (GDP), with growth stuck in low gear, a continuing health crisis, and chronic joblessness.
The guessing game that US economic forecasting has become has produced a massive split in predictions as economists from the Federal Reserve to the top Wall Street firms take a stab at unknowables like the path of the pandemic and the ability of a fractured Congress to compromise on spending.
It has given policymakers little solid to plan around and left the Fed reluctant to announce new steps to support the economy until it is clearer what is needed and for how long.
When Fed officials meet this week, they are not expected to take policy steps in part because of “a very uncertain outlook”, Cornerstone Macro analysts wrote this week. “Calibrating … in these conditions is very challenging.”
Adding to the challenge: Any rebound in GDP – the broadest gauge of economic activity – may well not be matched in the job market, leaving millions of unemployed Americans with no sense of recovery at all even if growth outperforms.
Indeed, since the 1990s, jobs have rebounded far more slowly from recessions than GDP as firms retool to use fewer workers and wait for demand to fully recover before hiring. Between the millions now out of work in vulnerable industries like travel and hospitality and changes in how commerce will be organised after the virus, it could take even longer this time for sidelined workers to find a new foothold.
The economy is currently about 11 million jobs below February’s level. It took more than four years, until mid-2014, to recover the eight million jobs lost in the 2007-2009 recession.
This recovery is clearly different. The economy’s addition of more than 10 million jobs over the past four months surprised many policymakers. The 8.4 percent unemployment rate as of August is already below the 9.3 percent median year-end expectation among Fed officials.
Central bankers this week must now judge whether or not that pace of improvement will continue, a discussion framed by new economic forecasts they will release on Wednesday afternoon.
When their last projections were issued in June there was a veritable chasm dividing them. Individual forecasts for 2020 saw GDP falling as much as 10 percent or as little as 4.2 percent. The gap was 10 times as wide as in December 2019, when year-end predictions between the most optimistic and most pessimistic officials were separated by only half a percentage point.
Year-end estimates of the unemployment rate as of June ranged from 7 to 14 percent, also several times wider than those common during the last recession and its immediate aftermath.
Economists do agree that when the federal government next month releases its first estimate of GDP for the July-September period, it will likely break records for growth just as the April to June period saw a record decline.
But from there they diverge not based on their models or their math, but on how they read the political winds and their best guess on the success of a coronavirus vaccine.
Assume Congress approves another $1 trillion stimulus, businesses rebuild inventories, and a vaccine comes online early next year, and you get Goldman Sachs’s league-leading call of 35 percent annualised growth from July to September, steady growth from there, and a quick climb to pre-pandemic levels of output.
Assume no stimulus, slow deployment of a vaccine, and lethargic spending because families and local governments are broke, and “the economy will never regain the pre-COVID trend line”, Deloitte LP senior manager Daniel Bachman wrote, among the few analysts predicting the current downturn to produce a permanent economic hit.
Many forecasters have boosted their outlook for the current quarter over time, as data has surprised to the upside. The Atlanta Fed’s running tally, or “nowcast”, of economic growth has nearly tripled since July to a 30.8 percent annualised rate, nearly matching the 31.7 percent drop in the second quarter.
The critical issue now is whether the run of good news continues.
“We should allow for the window of possibilities here to be broader than what we were thinking,” during the bleak early days of the pandemic, including that a “virtuous circle” of self-reinforcing outcomes could still develop, said Erik Weisman, chief economist of MFS Investment Management.
But for that “you’d have to see a flu season that is not so bad. No second wave (of the coronavirus). No blow up with China. Constructive news on a vaccine. And an election result that does not amount to a constitutional crisis,” he said. “Some of these will go the wrong way.”