CBO Says Pandemic Shaved $3.9 Trillion Off US Economy, Slow Down Will Linger

June 9, 2020 by Dan McCue
U.S. Capitol. (Photo by Dan McCue)

WASHINGTON – The coronavirus pandemic shaved roughly $3.9 trillion from the U.S. economy and will likely prevent the nation’s quarterly growth rate from climbing above zero percent through the end of 2021, the nonpartisan Congressional Budget Office said Tuesday.

The gloomy forecast was laid out in a letter to House Speaker Nancy Pelosi, whose staff had asked the CBO several questions related to the coronavirus pandemic’s impact on the nation’s economic outlook.

The letter compares two projections of gross domestic product: interim projections for 2020 and 2021 the CBO published in May 2020, and the projections the agency published in January 2020.

According to CBO Director Phillip Swagel, the biggest contributor to the sharp decline in the expected gross domestic product over the next 18 months is the anticipated $2.7 trillion reduction in consumer spending.

Consumer spending is the largest component of GDP, accounting for 68% of the nation’s economic activity in 2019.

“The next largest contribution to the change in projected GDP came from a projected decline in private investment, accounting for $1.3 trillion (or one-third) of the total,” Swagel wrote. “That projected decline arises mainly from a lower forecast of demand for the goods and services that businesses produce.

“Also, significantly lower oil prices will hit investment in the oil and gas industries disproportionately hard,” he added.

The CBO’s projection of state and local government purchases of goods and services fell by $350 billion, making up 9% of the total decline in GDP.

State and local governments’ purchases accounted for 11% of GDP in 2019.

The CBO assessment then turned to the four relief bills passed by Congress in March and April.

In total, the CBO said, those four laws are projected to increase the federal deficit by $2.2 trillion in fiscal year 2020 and by $0.6 trillion in fiscal year 2021.

Those amounts are projected to equal about 11% of nominal GDP in fiscal year 2020 and 3% in fiscal year 2021.

“In CBO’s assessment, those laws will partially mitigate the deterioration in economic conditions,” Swagel wrote. “In particular, greater federal spending and lower revenues will cause real GDP and employment to be higher over the next few years than they would be otherwise.”

The agency projected last month that the effects of the legislation on economic activity would be largest in the second and third quarters of 2020 and smaller thereafter.

It also said the four relief bills will affect the economy through several channels.

“For example,” Swagel wrote, “the payments and tax credits issued to individuals will boost the overall demand for goods and services by providing resources when many households are experiencing a significant loss in income.

“In addition, federal assistance for state and local governments will help pay for rising expenditures related to the pandemic as state and local tax revenues fall,” he continued, “[and] loans, grants, and changes in business tax provisions will provide liquidity to businesses experiencing financial distress because of social distancing and the sudden drop in economic activity, increasing the likelihood they will survive and preserve jobs for their employees until activity picks back up.”

But this boost in overall economic activity from the four relief bills will be tempered by social distancing, especially during the second and third quarters of this year, the CBO said.

“Continued business closures and the reduction in hours worked mean that the supply of certain goods and services will remain suppressed,” Swagel wrote. “At the same time, as people limit their social interactions, household and business demand for many goods and services will be subdued.

“Therefore, CBO estimates that as long as some degree of social distancing remains in place, the economic boost that might be expected from recent legislation will be smaller than it would be during a period of economic weakness without social distancing,” he said, adding, “CBO expects that some of the spending by individuals and businesses that is hampered by social distancing will be recovered in the future as stay-at-home orders and other interventions continue to ease.”

Asked how additional federal funding for states and local governments would affect the situation, the CBO said it would certainly stimulate economic activity in the short term, “by reducing the size of tax increases and spending cuts.”

But it warned that providing such funds to state and local governments would increase the federal deficit, and in the long term, increased federal deficits tend to slow the economy.

“CBO estimates that each additional dollar that was used to fund state and local governments by increasing the federal deficit would increase economic output over the next few years by about as much as would a dollar used to fund some policies recently enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act,” Swagel wrote.

“Other provisions of the CARES Act, such as increases in federal spending on Medicare, are expected to have larger effects on the economy,” he said. “Still other provisions, such as business tax provisions and refundable tax credits, are expected to have smaller effects—although the size of the effects would depend on the specifics of the provisions and the corresponding extent to which businesses and households spent the funds they received.

“In addition, funding for state and local governments would have different effects from those of the CARES Act on other outcomes—such as employment and the distribution of income—and on how outcomes vary by sector of the economy, geographic location, and demographic group,” Swagel concluded.


Fixing Unemployment Insurance for Better Economic Recovery
Fixing Unemployment Insurance for Better Economic Recovery
September 18, 2020
by Kate Michael

WASHINGTON — Emergency expansions to Unemployment Insurance provided critical support to workers across the country during the early months of the pandemic. But the major component of these expansions, an additional $600 in weekly benefits, expired at the end of July. With lawmakers continuing to be... Read More

Democrats Weigh Next Steps After Trump Backs Bigger Stimulus
Democrats Weigh Next Steps After Trump Backs Bigger Stimulus

WASHINGTON — Some House Democrats are keeping pressure on House Speaker Nancy Pelosi to bring a new coronavirus relief bill up for a vote next week as they look to signal to voters that the party is pursuing a deal to bolster the economy. Pelosi said... Read More

Fed Signals Rates Will Stay Near Zero for at Least Three Years
Federal Reserve
Fed Signals Rates Will Stay Near Zero for at Least Three Years

The Federal Reserve left interest rates near zero and signaled it would hold them there through at least 2023 to help the U.S. economy recover from the coronavirus pandemic. The Federal Open Market Committee “expects to maintain an accommodative stance of monetary policy” until it achieves... Read More

Despite Pressure for COVID-19 Relief Deal, Stalemate Continues
Despite Pressure for COVID-19 Relief Deal, Stalemate Continues

WASHINGTON — Speaker Nancy Pelosi on Tuesday headed a call from her members to commit to keeping the House in session until there’s a coronavirus relief deal, but the vow does little to break the stalemate in bipartisan negotiations that is at the heart of Democrats’... Read More

Problem Solvers Step Into Relief Bill Void to Offer Bipartisan Plan
Problem Solvers Step Into Relief Bill Void to Offer Bipartisan Plan
September 15, 2020
by Dan McCue

WASHINGTON - A bipartisan group of 50 centrist lawmakers on Tuesday unveiled a $1.5 trillion proposal they hope will end the current stalemate over new relief to bolster the coronavirus battered economy. The Problem Solvers Caucus, led by co-chairs Reps. Josh Gottheimer, D-N.J., and Tom Reed,... Read More

Trump Made a Promise to Save Coal in 2016. He Couldn’t Keep It
Donald Trump
Trump Made a Promise to Save Coal in 2016. He Couldn’t Keep It

President Donald Trump spent more than $1 billion in taxpayer funds, rolled back environmental rules and tried to stop power plant closings to fulfill a vow he made to West Virginia coal miners in the 2016 campaign. But nothing he’s done is rescuing the coal industry.... Read More

News From The Well
scroll top