Yahoo Finance’s Brian Sozzi and Alexis Christoforous break down the 2020 Q1 GDP results with Barclays Chief U.S. Economist Michael Gapen.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to dig deeper into this report now with Michael Gapen. He is Chief US Economist at Barclays. Good morning, Michael, and thanks for being with us. All right, so Emily just broke down this report for us. In your estimate, are we not just in a recession, but can we be looking at a depression, Michael?

MICHAEL GAPEN: Well, I think when you take into account the type of number where we're likely to see in the second quarter and the rise in the unemployment rate, yes, I think you could use that type of terminology. This number essentially just confirms, I think, what we already knew. As you mentioned, we do have the stay at home orders in place. All the social distancing effects that people were even doing it appears before those stay at home orders went into place.

So we already had a lot of information that the economy was contracting. It certainly is in a recession now. I would kind of hold off on the depression term until we know what the second quarter looks like, but yes, we and others are forecasting an unprecedented contraction in the second quarter. We're likely to see an unemployment rate near 20% as we move into the April and May period. Those are certainly numbers we have not seen since 1929 to 1933.

ALEXIS CHRISTOFOROUS: Michael, this is unprecedented in so many ways. I mean, in terms of a recession, we typically don't see a recession happen so quickly, right? It's usually a gradual process. The fact that we just-- because we slammed the brakes on this economy late in March. When we do start to reopen, what are your estimates, as you sort of look through the forest here, as to when we might start getting back to positive growth, or are you even going there in terms of an estimate?

MICHAEL GAPEN: Well, we are. I mean, so we-- I think we can all debate the details in the quarterly path, but I do think that there is broad agreement on the general outline, and that is a contraction in the first half, an unprecedented decline in the second quarter, but a resumption of growth in the third quarter. So we took our view on reopenings based off estimates of where peak hospital demand is across the country, and when that falls in the calendar.

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Most estimates put that between mid-April and mid-May. We assume governors would want information on the other side of that, that that indeed was the case. So we're thinking, beginning mid-May into mid-June, you can see a phased reopening of US economic activity across parts of the country, which would mean June should be better than May, and you should start to have upward trajectory as we move into the third quarter.

That's obviously dependent on whether we have an adequate testing regime in place, and we can quarantine and isolate affected persons effectively. We'll see if that's the case, but under the assumption that we can transition to a world where testing capabilities are elevated, we can avoid what I'll call, a macro mitigation story, where we need to shut down cities, counties, or states. And if that's the case, we should be growing then in the second half of the year.

BRIAN SOZZI: Michael, do you think by growing, does that mean fourth quarter GDP is positive, and what does that look like? What would positive GDP look like? We back low single digit growth, or are you expecting something bigger than that?

MICHAEL GAPEN: So at least in our baseline outlook, which follows the positive testing outcomes, we actually have a very sizable snapback in activity in the third quarter. We're down minus 45 in the second, and then we have it up 35% in an annualized rate in the third quarter, and then 10% in the fourth quarter. For the year as a whole though, that would mean the economy down around 6.4% or 6 and 1/2 percent year on year. So we recover, but it's not one to one.

We don't make everything up. Services activity is very difficult to make up. I think people will be slow to unsocial distance. There's likely to be negative wealth effects on consumption, and commodity prices are likely to keep the oil sector retrenching after the second quarter.

So we don't make everything up, but we do have solid rates of growth, and we would look for fiscal spending to keep the economy in an above trend growth path in 2021 and 2022. But it probably is still in an optimistic scenario. It could take three years to get the level of GDP back to where it was in Q4 2019.

ALEXIS CHRISTOFOROUS: Wow, three years. OK, Michael, so then when you look at areas of the economy that are going to start to come back to life, what areas are going to start to come back before others, do you think?

MICHAEL GAPEN: Well, certainly, I think you could see a bounce back in some of the goods side of the economy. As you mentioned, personal consumption was down. A lot of that was durable goods.

It was offset by solid purchases of food and other goods, but we've shut down the automotive sector for quite some time. That showed up in a lot of the industrial production and manufacturing numbers. If Detroit reopens production, even at a minimal level, the manufacturing side of the economy can begin to recover.

We're just assuming a slow rebound in the virus affected sectors, your tourism, restaurants, leisure, hospitality, all of the things that require face to face contact. So there we think the progress is going to be much slower. I also think if you look within the details of this report, spending on health care was actually down. It was a drag on consumption in the first quarter.

That likely reflects the fact that hospitals shut down all elective surgeries to deal with COVID. That's obviously where hospitals make a lot of revenue, and where individuals are making a lot of expenditures. That will likely come back as hospital procedures normalize, and they can both treat COVID patients, as well as conduct elective surgery.

BRIAN SOZZI: Michael, within the GDP report, one number that stood out to me among many here is the personal savings rate is now closing in on 10%. How high do you think that will go?

MICHAEL GAPEN: We don't have an explicit forecast on that. I'll just say that this is a typical reaction in a downturn, and one that was exacerbated by the stay at home orders, right? So normally when households move into precautionary mode, spending goes down and saving goes up. The good news is that means there is cash on hand for many households for when the economy does eventually reopen.

So part of the point of fiscal and monetary policy is to hold as much of the US economy in suspended animation as it can, while we're in this lockdown phase. So it does suggest that cash balances have built up on some household balance sheets, which could support spending and activity in the second half of the year. I just don't have an exact forecast. Something in the 10% to 15% range would be completely reasonable with what a model of consumption would suggest, given the decline that we've seen, given where we think wealth effects are, and where the unemployment rate is going.

ALEXIS CHRISTOFOROUS: These are just astounding numbers that we are rattling off the tongue here this morning, and have been for the past few days, Michael. And I want to get your thoughts on why the market is doing what it's doing? I'm looking at futures right now. Dow futures up about 450 points. You've got the broader market up about 2%. We just found out our economy contracted at a 4.8% rate in Q1. Is there a disconnect here between Wall Street and Main Street?

MICHAEL GAPEN: To some extent, yes. My interpretation of this would be that obviously, the market is forward looking. I think markets had already baked in a very bad first 1/2 of the year. So I think this number is expected and was priced into prior price declines.

I think the other component, at least from my point of view, is market participants may be looking at this and saying, if there's damage done, and permanent damage done, it's likely to be in very small business, and the types of institutions that don't have publicly traded equity. And your larger companies are likely to be in a better financial position out of this and gaining market share. And obviously, there's also a very tech heavy component to the indices.

Their market cap dwarfs many, many others. So if we're coming out of this and thinking, work from home is going to be elevated, and remote working conditions are important, that obviously benefits some tech companies. So I think it's some combination of all three of those, being forward looking, thinking the bigger companies are going to gain coming out of this, and the tech heavy index to begin with.

ALEXIS CHRISTOFOROUS: All right, Michael Gapen, Chief US Economist at Barclays, always a pleasure, and thanks for your insights this morning.

MICHAEL GAPEN: Thank you.