CERF Economists Predict GDP Drop of 50 Percent

As the economy continues to deteriorate, local experts have revised their predictions for GDP in the second quarter – and the outlook is even worse than they earlier expected. Economists Matthew Fienup and Dan Hamilton at the Center for Economic Research and Forecasting in Westlake Village said they now believe GDP will nosedive by an annualized rate of roughly 50 percent in the second quarter. That would be an astonishing six times more than the 8.4 percent decline in the worst quarter of the Great Recession and much worse than the 20 percent decline the same economists forecast at the beginning of this month. For the year, Fienup and Hamilton predict a GDP contraction of 12.7 percent. “Economic decline of this magnitude makes the so-called Great Recession look like a minor downturn,” the economists said in their report. Weekly unemployment insurance claims, they noted, provide an indication of the seriousness of COVID-19’s economic impact. The two call the approximately 17 million claims in the last three weeks “staggering.” According to Fienup and Hamilton, the duration of shelter-in-place orders and nonessential business closures will determine just how severe the contraction will be. They said most small businesses can’t sustain a shutdown of more than 30 days. “The importance of quickly lifting social distancing and shelter-in-place orders should not be underestimated. … We believe that a May 1 reopening of the economy would provide a fighting chance for American small businesses and their employees.” Of little help is the $2 trillion stimulus bill, or the CARES Act, Congress passed last month. Fienup and Hamilton said aid packages will be delivered too late to save many small businesses from going under. “It is likely to fail because monetary policy makers bound their own hands before the crisis began and because fiscal policy priorities stand in direct opposition to public health priorities. … The U.S. government can do little to reduce the severity and length of the Coronavirus Recession but can do much to prolong it.” The economists blamed Federal Reserve policy, which they said has distorted the stock market and left the Fed “relatively impotent as it confronts the current situation.” CERF is part of the management school at California Lutheran University in Thousand Oaks. It performs economic modeling and last year became a contributor to the Wall Street Journal’s Economic Forecasting Survey. Fienup and Hamilton also produce the Valley Economic Forecast for the Business Journal, which was held in January.