We're past the idea of a V-shaped recovery: Economist

Oxford Economics Chief U.S. Economist Gregory Daco joins Yahoo Finance’s Zack Guzman to discuss the latest GDP figures, weekly jobless claims and why U.S. durable goods tumbled for a second month in April.

Video Transcript

ZACK GUZMAN: But of course, the question becomes what that means for the overall economy when we do get that next jobs report, and also what will happen in Q2. Today, we got the update in terms of revised data from the Commerce Department showing that our first quarter GDP shrank at an annualized 5% pace. That was revised down from about 4.8% that was previously reported. But there's a lot to dig through in that report, and in order to do so, I want to bring in our next guest. Gregory Daco, Oxford Economics Chief US Economist, joins us now.

Greg, good to see you again. I guess there's a few things to go through in this report. To me, I mean, it's a bit of complaining about biting your tongue on the way to get a root canal because we already knew a lot about Q1 pain, but Q2 gonna be way worse. So what are the pieces that stood out to you in trying to gauge what investors should be bracing for in the second quarter?

GREGORY DACO: I think you're absolutely right in noting that this Q1 report was largely expected. We anticipated some slight downward revision to the data, but overall, there wasn't a big shift. What we saw was that consumer spending already in the first quarter shrank by a significant amount. As early as the latter part of half-- of March, we saw significant declines in consumer spending and business investment. And residential investment was actually doing relatively well.

I think if you take a look at the broader picture in terms of what this tells us for the economy is that this was just the first step in what is expected to be a severe contraction in economic activity, likely three times as bad as the global financial crisis. We're expecting a peak-to-trough decline in GDP that's going to be around 12%. So this simple rate decline of about 1.2%, 1.3% isn't massive in the third-- in the second quarter.

What we're looking for, more importantly, is how the economy recovers past this massive hit. And we're already starting to see some encouraging signs in terms of high frequency data as to how consumers are feeling, how businesses are gradually reopening. And that bodes for a relatively strong third quarter. But again, remember, this is coming from very depressed levels of activity.

ZACK GUZMAN: And I guess that's kind of the toughest part to tease out, right, when you look at sentiment on the consumer front versus business spending. And that was noticeable in this report, too. And you look at durable goods, that might be worth highlighting here. That, of course, being goods that are meant to last three years or more.

Orders and shipments in April showing that orders shrank-- orders shrank 17%. That was the worst since 2014. And shipments contracted 17.7%. That would be a record decline. So what does that tell you about how businesses might be bracing for Q2 in the way they're spending, and what that might mean when you get down there to Q3 and what level of rebound we're expected to see?

GREGORY DACO: Well, I think the state of business is really the most critical state of all because that will influence how income flows into consumers' pockets going forward. And that's going to be a big part of the recovery coming out of this global coronavirus recession. What we saw in terms of durable goods orders and shipments isn't so much about the month of April, it's about the combination of March and April. If you combine the two, you have declines of about 30% in terms of orders, about 25% in terms of shipments. So a quarter decline in the total amount of shipments, that's usually a good gauge for how business investment is going to fare in the GDP report.

I would note that the important element also that was perhaps overlooked in the GDP report was that corporate profits shrank massively. The corporate profit margin as a share of GDP fell to 8.5%. That's a record low since the global financial crisis. And as we look towards the rebound, we're going to be wanting to see businesses rehiring, gradually, and ensuring that they invest into the future. Barring an environment in which you see that rebound in business activity, whether at the large corporation-- on the large corporation front or in terms of small businesses, you're not really going to see much dynamism in the economy post the initial post-lockdown rebound.

So I think we have to be very careful at all these different indicators in terms of corporate profitability, small business activity, and overall employment once we're past that shock, because we now know how severe the shock is going to be. It's going to represent, again, more than a 10% decline in activity, more than a 30% decline in consumer spending, and likely business investment.

The key question is how strongly we will rebound. And the data that we got today in terms of employment, in terms of durable goods orders, in terms of GDP is really backward-looking. We're really trying to figure out how lasting the job cuts will be, how lasting the damage to economic activity will be, and how businesses will fare once they start thinking about the recovery and the rebound from this recession.

ZACK GUZMAN: Well, that's a good point to follow up on, too, though, when we look at that. I mean, you could point out in the jobs report, as Heidi did, economists expecting about a 20% unemployment rate in the latest clip, but when you look at further on in the year, even if you replace a lot of those jobs that had been lost due to this pandemic, you're still talking about 9% unemployment, potentially, by the end of the year.

And obviously, that will be far worse than what we had before all this happened, at about 3 and 1/2. So I mean, how does that play out in terms of what could be expected, I mean, even once you get into next year, 2021, in how this recovery looks, if you still have an unemployment rate that's more than double what we had going into it?

GREGORY DACO: Yeah, I think we're past this idea of a V-shaped recovery at this stage. The longer this lingers on, the more you're going to see longer-lasting, more permanent damage on the economy. That's going to be visible on the employment front. I think the initial claims, and in particular the continuing claims, are an illustration that, increasingly, we're no longer talking about temporary job losses, we're talking about more permanent job losses, with businesses closing.

In terms of the employment picture more broadly, we're expecting another 6, 7 million job loss in the month of May on top of the 21 and 1/2 million we've seen over the course of March and April. That will push the unemployment rate I think above 20%. Now, you have to figure out how people respond to the surveys, but overall, it doesn't really matter. We're seeing a massive hit to people's jobs.

We're also seeing-- and this is perhaps not discussed enough-- we're seeing a massive hit in terms of income because hours are being reduced and wages are also being cut. So the combination of all these factors will tell you how strongly consumers will rebound once they're allowed to escape the social distancing measures. It's not just going to be about the reversal of the lockdowns, it's going to be how comfortable people feel in this uncertainty environment, and how able they are to spend in an environment in which income has been severely impacted.

ZACK GUZMAN: Yeah. And so much, as we've covered, a lot of that tied to vaccine efforts, as well, and thoughts there on maybe not getting until the end of the year, as well, affecting that timeline for recovery. But Gregory Daco, appreciate you taking the time. Oxford Economics Chief US Economist. Always great to have you.

GREGORY DACO: Pleasure.