US GDP could be down 45% this quarter, but then do something very unexpected: economist

Zero to 100 real quick for the U.S. economy, maybe.

“In our baseline outlook which follows the positive testing outcomes, we actually have a very sizable snapback in activity in the third quarter. We’re down 45% in the second quarter [GDP], and then we have it up 35% in the third quarter and then 10% in the fourth quarter. For the year as a whole though, that would mean the economy is down around 6.4% or 6.5%,” said Barclays chief U.S. economist Michael Gapen on Yahoo Finance’s The First Trade.

Second quarter GDP being down 45% is one of the more bearish predictions on the Street. But it could prove to be on the mark judging by the lackluster read on first quarter GDP that only reflects a small sampling of the coronavirus’ effects on households and businesses.

First quarter GDP fell 4.8% versus estimates for a drop of 4%. It marked the first decline since 2014. Personal consumption expenditures. crashed 7.6%. The personal savings rate climbed to nearly 10%.

“The economy has fallen off the cliff and broken its neck with the only thing consumers are buying are nondurable goods like food and beverages for "off-premises consumption," and how!” said MUFG chief economist Chris Rupkey.

Stocks shrugged off the ugly data (per the new norm on the Street), putting more stock in the benefits to companies and households from the U.S. economy starting to reopen. Strategists also continue to have a bullish bent because of the unprecedented liquidity efforts by the Federal Reserve.

Despite his optimism though, Gapen acknowledges a full economic recovery will take time.

“So we recover, but it’s not one to one. We don’t make everything up. Services activity is very difficult to make up. I think people will be slow to unsocial distance. There’s likely to be negative wealth effects on consumption. And commodity prices are likely to keep the oil sector retrenching after the second quarter. So we don’t make everything up, but we do have solid rates of growth and we would look for fiscal spending to keep the economy in an above trend growth path in 2021 and 2022. But it’s still an optimistic scenario. It could take three years to get the level of GDP back to where it was in the fourth quarter of 2019,” Gapen explains.

Unclear if the bullish market understands that. Somehow we think the market will get it, eventually — and it could be a painful lesson learned.

Reprinted from Yahoo Finance, the copyright all reserved by the original author.