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The U.S. economy's recovery from the coronavirus-induced downturn will drag on through next year, as the pandemic inflicts potentially long-term damage to business investment and the labor market, according to the Congressional Budget Office.
In a bleak report released this week, the CBO forecast the nation's gross domestic product will plummet 38 percent on an annualized basis in the second quarter of the year — the worst drop on record — with 26 million more Americans out of work than at the end of 2019, more than triple the number of job losses in the 2008 financial crisis.
Although the economy is expected to begin growing gradually in the second half of 2020 as states roll back stay-at-home measures, the non-partisan agency forecast that any gains will not compensate for the unprecedented losses.
The nation's GDP will likely be 5.6 percent smaller in the fourth quarter of 2020 than a year earlier.
The CBO projected that unemployment will fall to 8.6 percent by the end of 2021, roughly 5 percentage points higher than it was pre-crisis, as social distancing guidelines continue to dampen business activity and the demand for employees. The labor force is also expected to shrink by 3 million workers in the fourth quarter of 2021, bringing the total labor force to 148 million, or roughly 7 percent lower than it was before the virus outbreak.
"The sharp downturn in economic activity and the rapid deterioration in labor market conditions are expected to have severe negative effects — both immediately and potentially over the long term —on many workers, households, and communities," the report said.
Three factors will likely continue to hamper job growth, the CBO said: First, the Paycheck Protection Program, which offers forgivable loans to small businesses to incentivize them to keep workers on their payroll, will "wane in the coming weeks or months, which may precipitate a new wave of layoffs and furloughs from businesses continuing to experience weak demand and lower revenues."
Health risks from COVID-19, combined with bigger unemployment benefits, could also hurt workers' incentive to look for a job.
And finally, a "notable" drop in state and local government tax revenue is expected to lead to additional layoffs.
The latest projection reinforces comments from Federal Reserve Chairman Jerome Powell earlier this week that the recovery process could stretch through the end of 2021 and may hinge on the completion of a successful vaccine.
"I would say though we're not going to get back to where we were quickly. We won't get back to where we were by the end of the year. That's unlikely to happen," the U.S. central bank chief said during a "60 Minutes" interview that aired on Sunday night. He added: "For the economy to fully recover, people will have to be fully confident. And that may have to await the arrival of a vaccine."