Unemployment to remain above 9 percent into 2021: CBO

Unemployment will average 9.3 percent next year, according to new projections from the Congressional Budget Office (CBO).

The nonpartisan agency forecast that the unemployment rate would peak at 15.8 percent next quarter and drop to 11.5 percent at year’s end, painting a bleak economic picture.

Unemployment would eventually dip down to 8.6 percent by the end of 2021, but the average for the year would hold at 9.3 percent.

The CBO painted a picture of an economy that will be far from fully recovered, even by the end of next year.

“Compared with their values two years earlier, by the fourth quarter of 2021 real GDP [gross domestic product] is projected to be 1.6 percent lower, the unemployment rate 5.1 percentage points higher, and the employment-to-population ratio 4.8 percentage points lower,” the report said.

The budget office also projected that the economy will contract at an annualized rate of 37.7 percent in the second quarter, before recovering at a 21.5 annualized rate in the third quarter and a 10.4 percent rate in the fourth.

All in all, the economy would close the year out 5.6 percent smaller than it started.

Things would be even worse were it not for the spate of legislation Congress approved to keep a floor under the economy.

“In CBO’s assessment, that legislation will partially mitigate the deterioration in economic conditions. In particular, greater federal spending and lower revenues will cause real GDP and employment to be higher over the next few years than they would be otherwise,” the report said.

The projection is a marginal improvement over the last estimate from late April, which saw the economy shrinking at 39.6 percent in the second quarter and unemployment peaking at 16 percent, with the average above 10 percent next year.

Turning to Congress’s response to the crisis, the CBO said that the combined $3.6 trillion in legislation would have the greatest effect in the second and third quarters, when most of the money would be going out the door, and a smaller effect down the line.

House Budget Committee Chairman John Yarmuth (D-Ky.) said the report bolstered the case for further stimulus once the worst of the pandemic is over.

“The historic aid packages delivered so far have been critical, but Congress must continue to help families who are stretching every penny, support Main Street businesses struggling to stay afloat, and ensure that protecting the lives and livelihoods of the American people remains the top priority in all policy decisions,” he said.

Federal Reserve Chairman Jerome Powell has made several statements in recent days warning that a longer downturn could leave lasting damage to the economy, and that massive spending to stimulate the economy would be “worth it.”

But the CBO also noted that social distancing measures made it harder for federal stimulus to permeate throughout the economy, as work hours remain suppressed and demand for goods and services stays low.

“CBO estimates that as long as some degree of social distancing remains in place, the economic boost that might be expected from recent legislation will be smaller than it would be during a period of economic weakness without social distancing,” the report said.