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The Congressional Budget Office has just released a devastating outlook for the U.S. economy this year.

GDP, adjusted for inflation, is expected to decline 5.6% for the calendar year, on a fourth-quarter to fourth-quarter basis, its biggest drop since 1946.

Second-quarter GDP — the weakest quarter — is forecast to contract at an annualized rate of almost 40% in the second quarter, which is even weaker than many, though not all, Wall Street economists’ projections.

The CBO expects the unemployment rate to surge to 14% in the second quarter and remain elevated for the rest of the year — 15% in the third quarter and 11% in the fourth. 

The unemployment rates reflect the projected loss of nearly 27 million people employed in the second and third quarters and the exit of roughly 8 million people from the labor force.

The labor force participation rate, which is the percentage of people in the civilian population who are at least 16 years old and working or seeking work, is projected to decline from 63.2% in the first quarter of this year to 59.8% in the third quarter.

The contraction in the economy coupled with the government’s fiscal response is expected to swell the federal budget deficit for the fiscal year, which ends Sept. 30, to $3.7 trillion, this fiscal year, falling to $2.1 trillion in fiscal 2021. 

The total federal debt load is expected to top the total economic output in the U.S. for this year, jumping to 101% of GDP, just slightly below the 106% ratio reached in 1946 after World War II.

Like most projections from economists, the CBO’s forecast expects the current quarter will be the weakest, followed by a rebound in the second half of the year. It projects annualized growth rates of 23.5% and 10.5% for the third and fourth quarters, respectively, “as concerns about the pandemic diminish and state and local governments ease stay-at-home orders, bans on public gatherings and other measures restraining economic activity.” 

It’s not clear yet when some states will ease those orders, however. Michigan and New York have extended their current stay-at-home orders to May 15 and California, the most populous state and the state with the largest economy, hasn’t yet decided on when it will ease restrictions.

The CBO said its projections incorporate expectations that current social distancing will continue through June, diminish by roughly 75% in the second half of the year and continue to a lesser extent through the first half of next year.

Its projections also include the possibility of a reemergence of the pandemic. Even once states allow economic activity to increase, “challenges in the economy and the labor market are expected to persist for some time,” according to the CBO. 

Given its overall economic outlook, the CBO also expects interest rates “to remain quite low” compared to rates in recent decades during the economic contraction. (It doesn’t use the word “recession.”)

The 10-year Treasury yield is forecast to average 80 basis points in 2020 and 70 basis points in  2021. Three-month Treasury bill rates are forecast at 40 basis points and 10 basis points, respectively, for those two years. By  2021 the CBO expects real GDP to expand by 2.8% on a fourth-quarter to fourth-quarter basis.

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