By Paul Hannon and Paul Kiernan
The U.S. economy could take the better part of a decade to fully
recover from the coronavirus pandemic and related shutdowns, a U.S.
budget agency said, as a series of surveys pointed to continuing
weakness in global manufacturing.
The Congressional Budget Office, a nonpartisan legislative
agency, said the sharp contraction triggered by the coronavirus
caused it to mark down its 2020-30 forecast for U.S. economic
output by a cumulative $7.9 trillion, or 3% of gross domestic
product, relative to its January projections. GDP isn't expected to
catch up to the previously forecast level until the fourth quarter
of 2029, the CBO added.
The roughly $3.3 trillion in stimulus programs enacted by
Congress since March will only "partially mitigate the
deterioration in economic conditions," the CBO said.
"After you get the initial bounce of economic activity simply
from removing the lockdowns, I think what we'll see is an economy
that is running at a level of activity notably below where we were
prior to Covid," said Michelle Meyer, chief U.S. economist at BofA
Merrill Lynch. "It's going to take a long time to heal. There will
be scars as a result of such a painful shock of the economy."
The CBO analysis came as new surveys showed that factories in
the U.S. and abroad continued to reduce output and shed jobs in
May, though the pace of deterioration moderated as governments
moved to ease coronavirus-related restrictions on their
economies.
Surveys of purchasing managers at manufacturers in the U.S.,
Asia and Europe offered signs that the decline in global factory
activity is starting to bottom out after the record fall seen in
April. But sentiment remained negative, suggesting any recovery in
the months ahead could be tentative.
The U.S. Institute for Supply Management's manufacturing index
for May rose to 43.1 from an 11-year low of 41.5 in April. The
index's core components all remained well below the 50 level that
marks the threshold between contraction and expansion. A majority
of survey respondents said both production and new orders worsened
in May from April, and two-fifths reported lower employment
levels.
The factory indexes add to other signs the U.S. and other
countries may have reached an economic bottom, though recoveries
could be slow. Unemployment is up sharply across the globe.
Services industries, hit particularly hard by the virus, are just
starting to recover. And consumer spending, an important catalyst
for the U.S. and other economies, remains weak.
"We're probably past the worst in terms of rates of decline, but
things are still quite bad," said Joshua Shapiro, chief U.S.
economist at Maria Fiorini Ramirez Inc. He said forward-looking
aspects of the ISM survey are still "extremely weak,"
The CBO now expects U.S. GDP to be 5.6% smaller in the fourth
quarter of 2020 than a year earlier, a sizable markdown from its
2020 projection of 2.2% growth made at the end of 2019 before the
pandemic.
While the economy is expected to resume growing after this year,
the pace of growth likely won't be fast enough to quickly make up
for the ground lost during the coronavirus pandemic. The difference
between the CBO's latest projection for GDP and its January
forecast "roughly disappears by 2030," adjusted for inflation.
The outlook for weak manufacturing is one factor weighing on the
ability of global economies to turn around.
Tim Fiore, who manages the ISM's factory survey, said he expects
further improvement in June as state governments allow more
nonessential economic activities to resume. But until a vaccine or
an effective treatment for Covid-19 becomes available,
social-distancing efforts will limit the number of workers allowed
on factory floors, likely restraining production.
Only in China, the first major economy to begin reopening after
the novel coronavirus outbreak, did factories report an increase in
activity. But the surveys suggested that its nascent economic
recovery is already beginning to stall, with export orders falling
sharply amid continued global efforts to contain the pandemic.
The surveys indicate the worst might be over for manufacturers,
and activity could start to increase in coming months. But the road
back to the levels of output and employment seen at the end of last
year is set to be long and bumpy.
"Whether growth can achieve any serious momentum remains highly
uncertain, however, as demand looks set to remain subdued by
social-distancing measures, high unemployment and falling corporate
profits for some time to come," said Chris Williamson, chief
business economist at IHS Markit, the data firm that compiles most
of the surveys outside the U.S.
In many countries, factory managers reported that restrictions
on movement continue to make it difficult for them to operate at
normal levels of output. But they also reported that weak demand is
holding them back, with new orders continuing to fall.
In a sign that factories don't expect conditions to improve
rapidly, many reported further job cuts. In India and South Korea,
those reductions in payrolls were the largest on record.
One problem highlighted by the surveys is that even where local
restrictions have been removed, or were never very severe to begin
with, the return to normality is being impeded by weak export
demand.
China -- the first country exposed to the virus -- entered
lockdown earlier than other countries. It also exited its lockdown
earlier, but May surveys of purchasing managers pointed to a large
decline in export orders.
That was also true of South Korea, which chose not to impose
mandatory lockdowns and focused instead on widespread testing and
tracing of those infected by the virus, and the people with whom
they had come into contact.
Separate figures released on Monday showed South Korea's May
exports were down 23.7% from a year earlier to $34.86 billion
following the prior month's revised 25.1% contraction.
China's Caixin purchasing managers index rose to 50.7 from 49.4,
a sign that manufacturing activity increased after having fallen in
April. A reading above 50.0 indicates an increase in activity,
while a reading below that level indicates a decrease.
However, other manufacturing powerhouses continued to experience
deep declines. Germany's PMI rose only slightly, to 36.6 from 34.5,
while Japan's PMI fell to 38.4 from 41.9.
Across the eurozone, Italy moved closest to a manufacturing
recovery, as its PMI rose to 45.4 from 31.1.
According to the CPB Netherlands Bureau for Economic Policy
Analysis, global industrial production was 4.2% lower in the first
three months of the year than in the final quarter of 2019. The
surveys of purchasing managers suggest the decline in the three
months through June might be even larger.
Write to Paul Hannon at paul.hannon@wsj.com and Paul Kiernan at
paul.kiernan@wsj.com
(END) Dow Jones Newswires
June 01, 2020 19:03 ET (23:03 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.