US Second Quarter GDP Collapses 32.9%: Virus lockdowns set dismal economic record

The Covid pandemic and its attendant closures have plunged the US economy into its fastest and deepest decline in history worse even than the Depression or the financial crisis.

Gross domestic product fell 32.9% on an annualized basis in the second quarter, according to the first release from the Commerce Department.  This estimate will be revised twice at one month intervals. Economists in the Reuters survey had forecast a 34.1% decline. The drop from the prior quarter was 9.5%.  

US GDP

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This recession began in March when economic activity collapsed as much of the country was locked in and the downturn was enough to drag the entire quarter, which had been expanding at about 3% in January and February, down to -5% for the three months.

In comparison the worst quarter of the financial crisis saw an 8.4% drop at the end of 2008 and in the first three months of 1958 GDP fell 10%.

GDP composition

Personal spending, which normally comprises about 70% of US GDP, subtracted about 25% from second quarter.  The service sector accounted for the majority of the decline as people stayed at home for two months all but ending health care, recreation dining and entertainment spending.

Overall consumer spending fell at a 34.6% annual rate in the second quarter.

There were also sharp contractions in the other major GDP categories of business investment and net exports.  Business purchases for research, equipment and construction dropped at a 27% annual rate.  Federal government spending rose as stimulus and unemployment benefits were paid.

Jobless claims

An increase in initial jobless claims in the last two weeks suggests that the rising number of Covid cases in a number of states is having an impact on the labor market.  

Claims climbed to 1.434 million in the July 24 week after reversing 15 weeks of improving figures on July 17. The number of people receiving benefits increased by 867,000 to 17.018 million, the first gain since the week of May 22.

Initial jobless claims

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Federal Reserve Chairman Jerome Powell noted yesterday in his news conference following the FOMC meeting that the “pace of the recovery looks like it has slowed since the cases began to spike in June.”

Information from credit- and debit-card purchases show spending rising into early June and then flattening with similar data on restaurants and bars.

Not all consumer spending is slowing.  Purchases of large ticket items that were deferred when the economy was shut, like homes, cars and large appliances rose in June.  

Employment also jumped 4.8 million in June after adding 2.8 million in May. Non-farm payrolls are expected to add 2.260 million workers in July when it is reported on August 7.  If accurate the economy would have recovered about half of the jobs lost in April.

Consumer confidence is starting to reflect the incomplete recovery. The two major surveys have declined in June, the Conference Board reading to 92.6 from 98.3 and the Michigan preliminary for July to 73.2 from 78.1 in June.

Conclusion and markets

Though the second quarter GDP debacle was not quite as bad as forecast, when combined with the fading prospects for July as the pandemic continues to undermine growth, markets are beginning to price an extended and weak US recovery.

Treasury yields fell with the 10-year shedding four points to 0.54% and the 2-year dropping one point to 0.121% (3:05 pm EDT).  One hour before the close the Dow was off 254 points, 0.96% and the S&P 500 was down 17 points, 0.49%.

The dollar lost ground against the euro, which climbed above 1.1800 for the second day, the yen where it dropped below 105.00 and the sterling which reached its highest since March 9.  

The Swiss franc climbed to its best level against the dollar since January 2015.  The aussie and the kiwi were essentially unchanged. Only versus the Canadian dollar did the greenback rise.