California Lutheran University’s economic forecast group is warning that policymakers have limited options to head off a downturn that could be worse than the Great Recession.
In an update to recent forecasts, the Center for Economic Research & Forecasting warns that massive stimulus efforts may not help speed a recovery if “countless numbers of small businesses” remain shuttered.
In its updated March 20 forecast, CERF estimated that GDP will fall 13 percent in the second quarter, a downturn more severe than the Great Recession. But CERF’s forecast shows the economy reducing its contraction quickly and finishing the year with -1.8 percent growth as GDP heads back toward historic trends in 2021.
Authors Dan Hamilton and Matthew Fienup warn that massive stimulus efforts may not be fully effective given that the Federal Reserve and fiscal policy makers have “exhausted many of the conventional tools” with ultra low interest rates and large deficits in place before the crisis hit.
The biggest challenge, they write, is making sure that small businesses remain solvent long enough to weather the crisis and rehire many of the millions of employees who have been laid off. That depends less on government largesse and more on the duration of shelter-in-place orders and greatly reduced demand for services ranging from bars to hotels to hair and nail salons.
CERF also warns that a prolonged downturn will put pressure on the finances of state, county and municipal governments as tax revenues plunge.