U.S. Overview

Recovery Should Begin as States Start to Re-Open

The measures that many state governors put in place to combat the spread of the COVID-19 outbreak led to a sharp decline in real GDP in Q1-2020. Incoming data suggest that economic activity will contract at an unprecedented rate in the second quarter, and we look for the unemployment rate, which jumped to 14.7% in April, to move even higher in May.

Under the assumptions that states slowly start to re-open and that the virus does not return in a meaningful way in coming months, then real GDP growth should turn positive again beginning in Q3-2020. We look for real personal consumption expenditures to grow strongly in the next few quarters due, at least in part, to pent-up demand for services. That said, many service providers likely will be operating at reduced capacity for some time. Furthermore, some businesses have closed permanently. Although we look for the unemployment rate to begin receding this summer, we project that it will still be above 6% at the end of 2021.

We also make the extreme assumption that Congress will fail to pass legislation that would provide additional support to state and local governments. The rationale for this assumption reflects uncertainties related to the timing and composition of any such legislation. The associated cutback at the state and local level should exert some headwinds on overall growth in 2021. But we acknowledge that real GDP growth could be a bit stronger next year if lawmakers indeed grant additional financial support to states and municipalities.

For International Update and additional information:   Wells Fargo Monthly Commentary May 2020

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