Updated Economic Projections See Resumption Downturn

The Congressional Budget Office has updated its economic projections through 2021 to account for the 2020 coronavirus pandemic. CBO’s latest estimates, which are based on information about the economy that was available through May 12, update the preliminary projections that the agency made in April. In developing those projections, CBO reviewed many private-sector forecasts. Some of those forecasts include expectations that additional pandemic-related legislation will be enacted, whereas CBO’s projections incorporate the assumption that current laws generally remain unchanged and that no significant additional emergency funding is provided. This report details those projections.

• The Pandemic and Social Distancing. The pandemic has profoundly affected the lives of millions of people. To mitigate the contagion, many households, businesses, and governments have taken measures to limit in-person interactions. Collectively referred to as social distancing, those measures include reducing social activities, working from home, and closing schools and businesses. CBO estimates that social distancing peaked in April 2020 across the country. To account for the chances of the pandemic persisting or reemerging, CBO projects that social distancing will continue, but to a declining degree. The agency expects that, from that peak, social distancing will drop by roughly two-thirds during the second half of this year and diminish further, but by smaller amounts, through the third quarter of 2021. That decline is in the middle of the distribution of possible outcomes, in CBO’s assessment, and allows for regional and seasonal variation.
• The Sudden Drop in Economic Activity. The pandemic and the social distancing measures taken to contain it have widely disrupted economic activity, causing a wave of job losses and ending the longest expansion since World War II. CBO estimates that real (inflation-adjusted) gross domestic product (GDP) will contract by 11 percent in the second quarter of this year, which is equivalent to a decline of 38 percent at an annual rate. In the second quarter, the number of people employed will be almost 26 million lower than the number in the fourth quarter of 2019.
• A Resumption of Economic Activity. The economy is expected to begin recovering during the second half of 2020 as concerns about the pandemic diminish and as state and local governments ease stay-at-home orders, bans on public gatherings, and other measures. The labor market is projected to materially improve after the third quarter; hiring will rebound and job losses will drop significantly as the degree of social distancing diminishes. However, those improvements will not be large enough to make up for earlier losses. Compared with their values two years earlier, by the fourth quarter of 2021 real GDP is projected to be 1.6 percent lower, the unemployment rate 5.1 percentage points higher, and the employment-to-population ratio 4.8 percentage points lower. Inflation and interest rates on federal borrowing will remain relatively low because of subdued economic activity and weak labor market conditions through 2021.