US Economic Outlook - 06 March 2020

Economic risks have shifted with the coronavirus hitting the global economy when economic resilience is already weak to start with. For the US, we have revised down our baseline forecast for GDP growth in 2020 by 50 bps to 1.1% yoy, although there is considerable uncertainty around the projections at this time. We have also revised up our probability of a recession within the next twelve months from 30% to 40%. The Federal Reserve has reacted forcefully, with an emergency meeting and a cut to the Fed funds rate of 50 bps. We expect another 50 bps of cuts soon, and a return to the zero lower bound is also a rising possibility. Yet we are very skeptical about how much lower policy rates can support actual economic activity (rather than financial markets) at the time of a potential pandemic. In further forecast changes, we have lowered our projections for long bond yields, with the 10-year Treasury yield expected to reach no more than 1.0% by year-end and to remain flat thereafter through end-2021. Given market dynamics and global weakness, a temporarily negative 10-year Treasury yield is also a possibility, even without a technical recession in the US.

Key takeaways:

  • Economic risks have shifted due to the coronavirus: we now expect real GDP growth of just 1.1% this year.
  • Our recession probability for the US has risen to 40%.
  • The Federal Reserve cut interest rates by 50 bps in an emergency meeting this week, we project two more cuts this year.
  • We have also revised down our forecast for 10-year yields.
  • A number of risk indicators have spiked recently.
  • The coronavirus is causing significant global supply chain disruptions.
  • The labor market showed strength pre-coronavirus, but this will change fast.
  • The consumer segment will face the coronavirus from a better position than pre-financial crisis.
  • Housing market activity remains a bright spot, with decent consumer balance sheets, low interest rates and modest supply implying lesser downside risk than prior to the last crisis.


Economic Outlook US Economic Outlook - 06 March 2020