WASHINGTON — The COVID-19 pandemic is sending the unemployment rate soaring, economic output plunging and the federal deficit hitting near-record heights.
The Congressional Budget Office issued new projections Friday showing real gross domestic product contracting at an annual rate of nearly 40% in the second quarter of this year. That would be far and away the largest drop in a single quarter in data going back to 1947 compiled by the Bureau of Economic Analysis.
Growth would pick up in the third quarter, the CBO said, but U.S. real GDP would still finish the year 5.6% smaller. That would be the worst annual economic performance on record, according to BEA data.
The unemployment rate would average 15% in the second and third quarters of this year, up from less than 4% in the first quarter, the CBO said in a blog post. The projected plunge is the result of nearly 27 million people newly unemployed since the pandemic began and roughly 8 million people exiting the labor force.
The 14% unemployment rate forecast for the second quarter this year would be far higher than ever occurred during the 2007-09 Great Recession, when the jobless rate never breached 10 percent. The rate is projected to hit 16% in the months leading up to the presidential election before tapering to a still-painful 11.7% in the final quarter of the year.
And the federal deficit for this year, which in January was expected to be $1 trillion, could now nearly quadruple. The CBO, the official nonpartisan scorekeeper on Capitol Hill, now projects a $3.7 trillion deficit for the current fiscal year.
The soaring red ink is the result of the virtual economic shutdown triggered by the pandemic, combined with an avalanche of new federal spending. Congress has now passed four relief packages since March that, by CBO calculations, are projected to add more than $2.4 trillion to deficits in the coming decade.
This year’s deficit would amount to 17.9% of GDP, a ratio not seen since World War II. The deficit was 21% of GDP in 1945, according to data from the White House Office of Management and Budget.
Federal debt held by the public, meanwhile, would be on track to set a record. It would amount to 108% of GDP by the end of fiscal 2021, topping the 106% it reached in fiscal 1946.
The only relative good news from the forecast is that interest rates are expected to remain low, thereby keeping debt more manageable. While greater federal borrowing would typically send interest rates upward, the CBO said, that pressure was “more than offset” by actions taken by the Federal Reserve and a demand for “low-risk assets” in the financial markets.
The interest rate on 10-year Treasury notes is expected to rise gradually from the current 0.6% to 0.7% in 2021. That would be 1.6 percentage points lower than the rate the CBO forecast in January.
While the latest projections were contained only in a brief blog post on the CBO’s website, the agency said it plans to release more details in mid-May.
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