A lot of economic news today, much of which was not encouraging. First, the long-awaited first estimate of GDP growth in 2Q 2020 was released by the Bureau of Economic Analysis and as anticipated the number was historic, with an annualized decline of 32.9% reported. Second, and for the second consecutive week, the number of initial claims filed for unemployment insurance rose. Third, the Chair of the Federal Reserve, Jerome Powell, encouraged Congress to act quickly to inject further fiscal stimulus into a weakening economic landscape.
Regarding the GDP report, the estimated inflation-adjusted output metric of all goods and services produced across the U.S. economy plunged 32.9% in the second quarter, a record one-quarter contraction of the domestic economy. This was more than three times larger than the previous record quarterly contraction and underscores the unprecedented impact of the pandemic on the broad economy.
A collapse in household spending (down 34.6%), which was already weak in the first quarter (-6.9%), led the plunge reflecting historically large job losses, stay-at-home orders, lockdowns, and large numbers of business closures. Services consumption was down by 43.5%, with the biggest declines coming in healthcare, as non-essential check-ups and procedures were delayed as well as dramatically less spending on entertainment and restaurants. Shutdowns and weak demand also weighed on business and residential investment. In contrast, the federal government fiscal stimulus contributed to a 2.7% rise in government spending, although that metric would have been larger had it not been for a 5.6% drop in state and local spending which reflects the revenue shortfalls at these jurisdictional levels.
Despite the drop in income associated with job losses, inflation-adjusted disposable income jumped by 44.9% at an annualized pace as unemployment insurance payments helped offset the loss of paychecks and tips.
A robust third quarter bounce back in GDP is looking less likely, given a resurgence in coronavirus cases that is weighing on economic activity. COVID-19 virus containment is key. Without it, a more complete reopening of the economy, which is crucial for recovery, will remain out of reach.
Separately, the Labor Department reported that jobless claims rose to 1.434 million in the week ending July 25, up from 1.422 million in the prior week. This marked the second consecutive weekly increase and the 19th consecutive week that claims exceeded one million. Up until two weeks ago, this metric had been falling on a consistent basis week over week. Continuing claims for regular benefits, which are reported with an extra week's lag, rose by 867,000 to 17.018 million in the week ending July 18. Including people who are collecting benefits under expanded pandemic assistance, 30.202 million people were receiving unemployment insurance in the week ended July 11. By this measure, the unemployment rate would be calculated as closer to the high teens level versus the 11.2% official rate reported by the Labor Department. The increase in the weekly rates reflects the resurgence in COVID-19 cases which in turn has resulted in a pause or in some situations a rollback of re-openings across some states.
Separately and earlier this week, the Conference Board reported that its index of consumer confidence fell in July as consumers became less optimistic about the short-term outlook for the economy and the labor market.
Meanwhile, the Federal Reserve met this week and provided a downbeat assessment of the economic outlook. While acknowledging that economic activity and employment had “picked up somewhat,” they still “remain well below” pre-pandemic levels. In the post-meeting press conference, Chair Jerome Powell doubled down on that point, calling the spread of the coronavirus “the most central driver” of the economy, and said the renewed surge in cases had led to a “slowing in the pace of the recovery”. At the same time, he acknowledged the uncertainty, saying how large and how sustained that slowdown will be is unknowable. He stressed that additional help from fiscal policy is essential, stating “fiscal policy can address things that we (the Federal Reserve) can’t address.” He called the pandemic and its fallout “the biggest shock to the U.S. economy in living memory.” Powell emphasized the pandemic will dictate the trajectory of economic recovery.
And with that, thank goodness there is no more economic news being reported today…