Conference Presentation, Earnings Call, Other
The CARES Act and its Impact on the US Economic Outlook
Goldman SachsSharmin Mossavar-Rahmani, Alec Phillips, Jan Hatzius, William G. Gale, Sharmeen Mosavar-Rahmani, Bill Gale
- Economic activity is forecast to contract severely, with Jan Hatsios predicting a 9% quarter-on-quarter annualized GDP decline in Q1 and a 34% annualized decline (approx. 10% in non-annualized terms) in Q2, potentially pushing April GDP levels 13% below January figures.
- Sector-specific downturns are projected to include sharp declines in face-to-face consumer services (-6 percentage points), a 75% drop in hotels, food services, and car rentals, and a 90% fall in casino and entertainment activities, while healthcare is expected to contribute a 1.6% GDP increase of roughly $350 billion.
- Future recovery assumes infections will drop sharply within the next month, allowing for gradual normalization by May or June and driving forecasted Q3 and Q4 annualized growth rates of 19% and 12% respectively, resulting in an estimated full-year average GDP growth of 6.2%.
- Fiscal stimulus measures include $1,200 individual payments per adult and $500 for children expected to be distributed primarily in April, alongside small business loans with limited underwriting where most borrowers are expected to automatically qualify and receive loan forgiveness.
- Treasury financing plans involve raising approximately $800 billion in April and another $600 billion in May, utilizing a strategy focused on short-term bill issuance (one to six months) and increasing annual coupon security issuance from $200 billion to potentially $300 billion by year-end.
- Remaining Treasury funds of $454 billion could theoretically support $4.5 trillion in total capacity utilizing the Federal Reserve's leverage ratio, while a new "Main Street lending program" is anticipated to be announced within the next couple of weeks.
- Additional fiscal legislation is projected for "phase four" and potentially "phase five," with the former expected to be several hundred billion dollars and arrive one to two months out, potentially including state aid and unemployment extensions, though lawmakers may face deficit concerns regarding a total deficit of over $3 trillion.
- The net debt-to-GDP ratio is expected to rise from roughly 80% to over 100% within the next one to two years, representing a potential 20 to 25 percentage point increase over two to three years due to structural factors.
- Despite the deficit increase, consensus opinions state that U.S. government default is unlikely, the elevated debt levels do not threaten the U.S. assets' status as a safe haven or reserve currency, and a financial reckoning would not stem from public debt given low interest rates and Federal Reserve support.
- Risks to real returns for Treasury investors include the possibility of higher inflation, while future fiscal space for infrastructure and tax cuts may be constrained by the size of the budget deficit once the immediate crisis passes.