The nonpartisan Congressional Budget Office (CBO) released its updated economic forecast Tuesday, estimating unemployment in the United States will remain high well into 2021 because of the persistence of social distancing will suppress U.S. economic activity and the labor market over the next two years.
The U.S. unemployment rate will peak at 15.8% in the third quarter, said the CBO. The jobless rate will likely remain at a high 8.6% by the fourth quarter of 2021. CBO expects the unemployment rate to average a depressing 9.3% in 2021 since it estimates social distancing will remain in place until then.
It sees the unemployment rate falling to 8.6% by the end of 2021, however, compared to only 3.6% in January before the COVID-19 pandemic became widespread. The unemployment the rate stood at 3.5% in February and 4.4% in March but skyrocketed to 14.7% in April.
A historically massive 20.5 million Americans lost their jobs in April when the unemployment rate jumped to 14.7% (a post-World War Two record) from only 4.4% in March.
CBO estimates the U.S. economy contracted by 4.8% in the January-March quarter. It projects U.S. GDP will shrivel at an annual rate of 38% in the second quarter of this year.
CBO said real GDP by Q4 2021 should be 1.6% lower compared with their values two years earlier. The unemployment rate is estimated at a high 5.1% while the employment-to-population ratio might be 4.8% lower.
Despite this unnerving news, CBO does predict the U.S. economy might bounce back sharply in the third quarter of this year after collapsing in Q1 and Q2 due to immense supply and demand destruction caused by social distancing. The U.S. economy might fully recover lost ground only in 2022, said the CBO.
CBO pointed out the four coronavirus recovery laws enacted by the U.S. Congress since the beginning of March should increase the federal deficit by $2.2 trillion in the fiscal year 2020 and by $600 billion in the fiscal year 2021. These sums are equivalent to 11% of nominal GDP this year and 3% in fiscal 2021.
In total, the CBO doesn't expect U.S. GDP to return to its heights at the start of this year within the forecast period that extends until the end of 2021. It affirmed estimates by other experts the U.S. economy is still reeling from its biggest economic destruction since the Great Depression of the 1930s.
CBO said its new estimates are slightly better than its previous projections issued in April. The latest numbers, however, underscore how extensive and extended the economic damage inflicted by COVID-19 on the U.S. will likely be.