The U.S. economy is growing but is largely moving sideways.
That was the view from Mark Zandi, chief economist at Moody’s Analytics, during the first session of NCSL Base Camp 2020.
Zandi said he expects the pandemic to end by the spring of 2021 “assuming an effective vaccine is widely distributed by March or April” but didn’t expect a full recovery until late 2023, when the unemployment rate would return to between 4% and 4.5%.
“This is not a V-shaped recovery,” he said. “It’s going to be more difficult.”
Of the 22 million jobs lost during March and April, half of those have been regained, but the remainder are permanently lost in industries that are completely changed or failing, he said. “They are going to have a bit of a struggle moving to other jobs or other parts of the country.”
Unlike other downturns, this has been ecumenical, with all parts of the country affected.
“The state economy hit the hardest is Hawaii, which is not much of a surprise,” he said, citing its dependency on travel and tourism.
Policymakers must continue to “keep their foot on the accelerator and provide a lot of stimulus,” he said. “The fed has been very aggressive, dropped interest rates to zero very quickly. That’s been instrumental in supporting the financial markets.” Only Australia, he said, has been more aggressive than the U.S.
Congress is stalled on a second fiscal rescue package, “but it’s vitally important that they do, and at the top of that list would be (aid to) state and local governments.”
Moody’s forecast is that budget shortfalls for state government and increases in Medicare expenditures come to almost $300 billion through fiscal year 2022 and rises to about $450 billion when local governments are included, he said. If the U.S. endures a “second wave” of the pandemic, those costs could rise to $650 billion.
Without support from the federal government, he said, “states and local governments are going to have to curtail spending very quickly.
“If Congress fails to pass a fiscal rescue package in the next couple of weeks, and the window is going to close on Oct. 1, then I do think the odds of a double-dip recession are high,” he said.
Zandi said assistance to state and local governments has a 1.34 multiplier, meaning the federal government gets back $1.34 for every $1 in funds sent to states. By contrast, cutting the corporate tax rate returns about 35 cents for every $1.
“There is some sliver of hope that they might be able to do this,” he said, “but it seems like we’ve seen this movie before, and we know what the ending is.”
Mark Wolf is the editor of the NCSL Blog.
Additional NCSL Resources