Short Lived Recession’s Impact on Inflation Rates and Budget Deficit

After experiencing a 30 percent decline in the United States GDP at the hands of a COVID-19 driven recession, we are looking to witness a 3rd quarter comeback (preventing another infection surge). However, the effects of the recession will be felt for many months beyond this 3rd quarter. The federal budget deficit is set to hit a record high 3.3 trillion dollars, according to the Congressional Budget Office. Naturally, this extremely high deficit is a symptom of massive government spending for Coronavirus stimulus relief and the failed attempt at preventing the virus’ spread through state mandated nationwide shutdowns. Governmental spending was marked at an immense 6.6 trillion dollars after four COVID-19 relief packages were passed through congress. That number will only look to increase as a result of the bill passed through the house at a staggering 3.5 trillion dollars for coronavirus relief. However, it is likely that the bill passed by a Democratic majority led House will be negotiated down (Speaker Pelosi announced a willingness to lower it to 2.2 trillion). Despite the inevitable drop in costs, the deficit will inherently increase. By the end of the year, the US debt will total approximately 98 percent of the US GDP, eclipsing the deficit numbers we witnessed during the 2008 Great Recession. Furthermore, the current projections reveal a larger debt total than GDP in 2021. A large contributor to these debt numbers is a drop in tax revenue equivalent to 11 percent from household incomes and 34 percent from corporate taxes. Although these numbers are rather terrifying, we can easily expect to see immense third and 4th quarter growth carry into next year. The Feds are looking to keep the interest rates relatively the same according to the Fed’s Bullock, likely sitting at 2 percent for the next few years with slight upward trending variations. Overall, however, we should not be worried as likely the worst is over and as our nation continues to loosen business and social restrictions, we will witness an exponential growth in our economy to the point of recovery within a few years.

Keith Knutsson of Integrale Advisors commented that, “Although the severity of the short recession will stain our economy for months to come, nationwide state reopenings will soon pave the path towards fiscal stimulus and eventual recovery.”