In order to forecast our economic landscape going forward, we must first assess the extent of the damage done to the U.S. economy from the once-in-a century occurrence that has emerged over the past half year. This coronavirus has caused record levels of unemployment and impairment in national output not seen since the Great Depression. Business investment and investment intentions have also diminished in the face of unparalleled uncertainty.

A useful first approximation of the economic sectors affected by the virus, and to what degree, comes from a June 2020 memorandum published by the Congressional Budget Office (CBO) in response to questions from the office of the Speaker of the House of Representatives Nancy Pelosi. By comparing changes in their interim projections for gross domestic product (GDP) between January 2020 (pre-pandemic) and May 2020, the CBO examines how they expect the coronavirus has and will continue to impact the economy from the beginning of 2020 through next year. Their analysis provides a firm starting point in gauging the short- and long-term U.S. economic outlook.


How Much Has CBO’s Projection of GDP Fallen?
Nominal GDP is $3.9 trillion lower over the 2020–2021 period in CBO’s May projections than in its January projections (see Table 1). In the May projections, nominal GDP grows an average of zero percent from the fourth quarter of 2019 to the fourth quarter of 2021—the result of a decline in real (inflation-adjusted) GDP offset by some increase in overall prices. In the January projections, by contrast, nominal GDP growth averaged 4.1 percent over that period.

What Were the Largest Components of the Decline?
A $2.7 trillion downgrade to CBO’s projection of consumer spending made the largest contribution to the $3.9 trillion change in projected GDP over the 2020–2021 period. It accounted for about two-thirds of the decline.

The differences in the table are expressed at a quarterly rate (not at an annual rate, as commonly presented by the Bureau of Economic Analysis) to capture the actual dollar amount lost. An annual rate would represent a change in production in one quarter as if it persisted for a full year and therefore would be less appropriate in understanding exactly how gross domestic product changed in that one quarter alone. Because of rounding, the differences shown for components of gross domestic product may not add up to the differences shown for gross domestic product.

Consumer spending is also the largest single component of GDP, making up 68 percent of the total 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.

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.

How Much Did State and Local Governments’ Purchases Contribute to the Decline?
CBO’s projection of state and local governments’ purchases of goods and services fell by $350 billion, making up 9 percent of the total decline in GDP. State and local governments’ purchases accounted for 11 percent of
GDP in 2019.

Following this June letter to Speaker Pelosi, the CBO published an update to their longer-term economic outlook in July, through year 2030. CBO now projects that following a sharp contraction in economic activity in 2020, real GDP growth will recover to around 4% in 2021. Their expectation is for additional annual growth of real GDP in 2022 of almost 3% and then a leveling out to about 2% per year through year 2030.

How this all pans out of course depends on the path of the virus. In assessing the likelihood of CBO’s projections, I find it useful to examine how past pandemics of comparable scope to the novel coronavirus progressed. The novel coronavirus pandemic stands along with a small number of similar events in American economic history, most directly obvious being the Spanish Flu (1918-1920). And before that, for example, the yellow fever epidemic of 1793 which caused huge devastation in Philadelphia (then the new temporary capital of the emerging United States of America).

What we learn from past pandemics is that usually the economic contraction, though significant, has been temporary. A paper published by the Federal Reserve Bank of St. Louis in 2007 examines the economic impact of the Spanish Flu in 1918. Owing to a lack of economic data, they rely heavily on print media to paint a general picture of the economic effects of the pandemic. The key takeaway is that while many businesses suffered significant short-term losses in revenue, the contraction was short-lived.

Despite the uncertainty surrounding a possible resurgence in autumn, we remain hopeful that new COVID cases will continue to decline into September and that a vaccine should become available in the next 6-12 months. This will pave the way for continued economic recovery in 2021 as projected by the CBO.

About the Author

Dr. Alan Greenspan

Dr. Alan Greenspan

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was...
About the Author