With unemployment claims in hand, we can estimate the unemployment rate. Simple math would tell us that if 15% to 20% of the workforce has been laid off and the starting unemployment rate is 4.4%, the current unemployment rate is around 20%. The official unemployment rate (due in early May) will likely be lower—to be counted as unemployed, people must be looking for work, which is a challenge during an economic shutdown. However, the official rate will certainly be well over 10%, probably somewhere between 15% and 20%.
An Initial Rough Estimate of US GDP
Using the unemployment rate, we can get to a rough GDP estimate. At the peak of the GFC, the unemployment rate jumped by four percentage points year over year, coinciding with a 4% year-over-year GDP decline. The current crisis isn’t directly comparable to the GFC—given the sudden halt in activity and a much faster unemployment spike—but we can use it as a starting point to estimate GDP.
Let’s say unemployment is 15% at the end of the second quarter—an 11.3% rise from 12 months prior. If the 2008/2009 relationship holds, this would translate to a year-over-year GDP contraction of about 11%, or a 13% decline from the peak at the end of last year. If true unemployment is more like 20%, we’d be looking at an 18% peak-to-trough GDP decline.
Based on that analysis, and given our initial guess of a 7.5% GDP contraction, it seems safe to say that economic risks are clearly skewed to the downside at this point—and that the total contraction in GDP will be higher than 7.5%.
Bear in mind the uncertainties around this GDP estimate. For one thing, we don’t know how long the unemployment spike will last. We’re barely into the second quarter, and it’s very possible some workers will be back in action before June ends. Also, the unemployment/GDP relationship isn’t precise, especially given the unprecedented nature of this shock.
On a positive note, the rapid fiscal policy response suggests that government spending will fill in some of the missing GDP. If households can access greater—and even enhanced—unemployment benefits, it should blunt the impact to some extent.
A Bigger GDP Penalty…and an Incomplete Recovery Picture
Still, we expect to release a larger estimate for the near-term shock with our revised GDP forecasts at the end of the month. Something on the order of 10% to 12% seems sensible today, though incoming data on labor and government spending between now and then will enable us to refine the number.
We expect an eventual recovery once the public health situation eases, but we don’t yet have the information we need to make any new assumptions about how it will play out. As a result, it’s too early to update that part of the GDP forecast just yet.
The combination of a sharper slowdown and insufficient data to update the recovery will pull our US GDP forecast down to roughly –5% for the full year. We are, of course, hopeful that a robust recovery will start in the next few months and that the next adjustment to our forecast will be upward. But based on the information available today, it’s too early to have confidence that will be the case.
