NEW YORK, United States – The US economy experienced the strongest downturn since at least the 1940s in the second quarter, highlighting how the pandemic devastated businesses across the country and left millions of Americans unemployed.
Gross domestic product contracted 9.5 percent from the first quarter in the second quarter, down from an annualized rate of 32.9 percent, the Department of Commerce’s first estimate showed on Thursday. That is the strongest annual decline in quarterly records from 1947 and is comparable to analyst estimates for a shrinkage of 34.5 percent. Personal spending, which accounts for about two-thirds of GDP, declined 34.6 percent year-on-year, also the highest ever.
The numbers record the magnitude of the economic devastation that resulted from government-ordered shutdowns and those at home, intended to slow the spread of the new coronavirus, halting the longest-running expansion. While employment, spending and production have improved since the reopenings picked up in May and the massive federal stimulus reached Americans, a recent wave of infections has dampened the pace of recovery.
That wave, due to America’s failure to control the virus, indicates that the US economy is likely to recover more slowly than places that have done better, such as the euro area. And the longer the pandemic lasts without a vaccine, the longer economic output will remain below pre-crisis levels, leaving many companies and workers with lasting scars.
“We already know that activity recovered strongly in May and June, paving the way for a sharp rise in GDP in the third quarter,” Andrew Hunter, a senior US economist at Capital Economics, said in a note. “Nevertheless, with the more recent virus flare-up beginning to hit the economy in July, an uninterrupted ‘V-shaped’ recovery is unlikely.”
A separate report on Thursday showed that the number of Americans who applied for unemployment benefits rose for a second consecutive week. Initial claims through regular state programs rose to 1.43 million in the week ending July 25, up 12,000 from the previous week, the Labor Department said. There were 17 million Americans who sought continuous benefits through these programs in the period ending July 18, up 867,000 from the previous week.
US stocks fell most in a week after the data was published, and yields on 10-year government bonds fell.
While the economic reboot has helped put 7.5 million Americans back to work in May and June together, labor costs have fallen by more than 14.5 million from their pre-pandemic peak. The rapid deterioration in the economy and the labor market explains why the Federal Reserve keeps its reference rate near zero and why it has rolled out several emergency credit programs to promote liquid trading conditions in the financial markets.
“We have seen some signs in recent weeks that the proliferation of virus cases and renewed measures to control them are starting to depress economic activity,” Fed Chairman Jerome Powell said at a news conference Wednesday after the two-day central bank policy meeting. “On balance, the data seems to point to a slowdown in the recovery,” although it was too early to say how big – or long – this period would be, he said.
With elections only three months away, US voters will have to decide whether to re-elect President Donald Trump for a second term against the background of the virus-induced recession and his response to the health crisis.
The pandemic toll on household service expenditures was breathtaking: an annual decline of 43.5 percent during the quarter, subtracting nearly 23 percentage points from GDP. Meanwhile, expenditure on goods declined 2.1 percentage points.
Following the adoption in late March of the Cares Act, the largest U.S. stimulus package in modern history, government spending and investment rose 2.7 percent year-over-year as non-defense spending grew 39.7 percent, the highest since the Vietnam War in 1967. Government and local spending fell at a rate of 5.6 percent amid sharply declining tax revenues.
The report also found that stocks declined nearly 4 percentage points of GDP, while trade increased by 0.7 percentage point.
The quarterly profile of the economy – as shown in the GDP report – shows a very different picture from the monthly data. As the shutdowns gradually lifted and states reopened, economic activity came back to life in May and June – just not at the pre-pandemic level.
Millions of people returned to work, and Americans ventured out of their homes to return to newly reopened shops and restaurants. Supported by aid payments and unemployment benefits, retail sales recovered close to pre-pandemic levels, with consumer spending rising the highest in May, although still below its February level.
The recovery in activity will be largely reflected in the third quarter figures, which will not be released until October 29, just days before Election Day. But the wave of viruses has caused the economic recovery to stall for several weeks as consumers hold back spending and travel amid continued layoffs, according to the Bloomberg Economics recovery tracker.
Crucial pandemic lifelines, such as the additional $ 600 in weekly unemployment benefits, are ending as the economic recovery shows signs of faltering. Legislators are currently debating another incentive package to support businesses and the unemployed, but the timing of the bill is unclear. Congressional support has supported the economy in recent months, and further action will be critical in determining the path of recovery.
This is the first estimate of three for the second-quarter figures, and the figure is likely to be revised in the next two months as the Bureau of Economic Analysis receives further data.
By Reade Pickert