The U.S. budget deficit will hit a nominal record of $3.7 trillion, well above the $1.413 trillion seen in 2009, director of the nonpartisan Congressional Budget Office (CBO) said on Friday.
In its first comprehensive look at the economic and fiscal damage done by the coronavirus, the CBO added that the U.S. economy is expected to shrink at an annual rate of almost 40 percent in the second quarter.
CBO also said the unemployment rate would peak at 16 percent during the fourth quarter of the year.
“The economy will experience a sharp contraction in the second quarter of 2020 stemming from factors related to the pandemic, including the social distancing measures put in place to contain it,” CBO Director Phill Swagel said in a blog post on the agency’s site.
“In the third quarter, economic activity is expected to increase, as concerns about the pandemic diminish and state and local governments ease stay-at-home orders, bans on public gatherings, and other measures restraining economic activity. However, challenges in the economy and the labor market are expected to persist for some time,” Swagel added.
The impact of the sharp decline in output on the U.S. government’s bottom line is expected to be sharp, he said.
In addition to the $3.7 trillion 2020 deficit, the CBO said government debt held by investors and other members of the public would hit 101 percent of the size of the U.S. economy by the end of the financial year in September.
At the end of the 2019 budget year, the debt totaled 79.2 percent.
Interest rates on the Treasury 10-year note were forecast to average 0.8 percent for 2020 and drop to 0.7 percent in 2021.
However, Swagel warned the forecast is subject to “enormous uncertainty,” but falls in line with those in the private sector and is closer to those expectations that see more weakness in the near-term.
“CBO’s projections incorporate an expectation that the current extent of social distancing across the country will continue—on average and with regional variation—through June. The agency’s projections also include the possibility of a reemergence of the pandemic. To account for that possibility, social distancing is projected to continue, although to a lesser degree, through the first half of next year,” Swagel said.
In its forecasts for gross domestic product, the CBO said the size of the U.S. economy would shrink by 11.8 percent in the second quarter compared with the first quarter, a pace that, if maintained, would lead to a 39.6 percent fall on an annualized basis.
For the third quarter, the CBO expects growth returning, with GDP rebounding at a 23.5 percent annual rate.
Unemployment is projected to reach 14 percent in the second quarter, peak at 16 percent in the third quarter before falling back to 11.7 percent in the last three months of the year.
“The increase in that rate in the second and third quarters reflects the net effect of a projected loss of nearly 27 million in the number of people employed and the exit of roughly 8 million people from the labor force,” Swagel noted.
He also said the CBO would release more details on its projections by mid-May.
