The U.S. economy suffered its sharpest downturn since at least the 1940s in the second quarter of this year, highlighting how the coronavirus pandemic has ravaged businesses across the country and left millions of Americans out of work. The picture for the third quarter is brighter, but starting to fade, requiring additional action and relief.
Gross domestic product (“GDP”) shrank 9.5% in the second quarter from the first quarter, a drop that equals an annualized pace of 32.9%, the Commerce Department’s initial estimate showed Thursday:
That was the steepest annualized decline in quarterly records dating back to 1947 and compares with analysts’ median estimate for a 34.5% contraction. Personal spending, which makes up about two-thirds of GDP, slumped an annualized 34.6% during the quarter, also the most on record.
The pandemic’s toll on household spending for services was overwhelming – a 43.5% annualized slide, subtracting nearly 23% from GDP alone. Meanwhile, outlays for goods took away 2.1%.
These figures reveal the extent of the economic devastation that resulted from the government-ordered shutdowns and stay-at-home orders issued to slow the spread of the coronavirus that abruptly brought a halt to the nation’s longest running expansion.
The result of recent failures to contain the virus indicates that the U.S. economy is likely to recover at a slower pace than previously anticipated. The longer the pandemic lasts without a vaccine, the longer the economy will remain below pre-crisis levels.
A peak at GDP and economic activity going forward
The Q2 2020 GDP release shows the worst of the economic damage is likely over.
Economic activity rebounded in May and June, setting the stage for recovery in the third quarter. Millions of people headed back to work, and many began to once again venture out of their homes to spend at reopened stores and restaurants. Bolstered by relief payments and unemployment benefits, retail sales rebounded to near pre-pandemic levels and consumer spending surged by the most on record in May — though overall spending still fell short of the pre-virus levels. Recently, figures have shown a pickup in home sales as Americans take advantage of record-low mortgage rates.
But given rising coronavirus related numbers and renewed local lockdowns in July, the first month of the third quarter, the recovery is losing momentum. Timelier data like jobless claims and consumer confidence have begun to stall. With the recent virus resurgences starting to weigh on the economy, hopes of a “V-shaped” recovery are becoming unlikely.
Even with these setbacks to start the third quarter, the 3Q 2020 report is still expected to show a rise in GDP. Preliminary estimates are forecasted in the range of 16-17%, on an annualized basis. Sharper analyses and forecasts for this next report will be forthcoming over the next few weeks. The official initial 3Q GDP figures will not be released by the Department of Commerce until October 29th, just a few days before the national elections.
Initial jobless claims rose again last week
Also on Thursday, a separate report showed the number of Americans filing for unemployment benefits increased for a second straight week. Initial jobless claims through state programs rose to 1.43 million for the week ended July 25th, up 12,000 from the prior week, according to the Labor Department. There were 17 million people filing for ongoing benefits through those programs in the period ended July 18th, up 867,000 from the prior week.
While the economic restart has helped put 7.5 million back to work in May and June combined, payrolls are down more than 14.5 million from their pre-pandemic peak.
With this unemployment insurance report being released back-to-back with the record-making 2Q GDP report Thursday morning, the fixed-income market saw Treasury yields fall to, or near, record lows along with their counterpart interest rate swap levels.
Treasury yields (which are calculated on a semi-annual, 30/360 basis) from two to five years currently range from 0.11% to 0.22%, while interest rate swap levels for these same maturities range from 0.18% to 0.27%, when using the same basis:
Nord Stream 2 Map
Fed completes its two-day FOMC meeting
The Federal Reserve’s Open Market Committee (“FOMC”), as markets had factored in, held the Federal Funds Rate target steady in a range near zero at its two-day meeting Tuesday-Wednesday. It has been more than four months now since the Fed pushed down its benchmark rate to between zero and 0.25%.
“The path of the economy will depend significantly on the course of the virus,” the Fed’s statement said in new language added from this week’s meeting.
These FOMC meetings are becoming more about what Federal Reserve Chairman Jerome Powell has to say at the post-meeting press conferences and less about what the Fed plans to do with rates. A major question Powell faces is whether current Fed tools and actions can continue if inflation starts to show up due in part to the weak dollar that low rates tend to contribute to. As for inflation, the pandemic has had a mixed impact. It has raised food prices due to supply constraints, but prices for travel and leisure have fallen. At this point, a bit of inflation might be welcomed by some as a sign of economic strength, though others would say higher prices are the last thing Americans need as they struggle to provide for their families during these difficult times.
The Fed is trying its best to use dovish policy to inject some positivity along with liquidity back into the economy, and it’s statement indicated it does see some reason for optimism.
Powell scattered his post-meeting remarks Wednesday with some good news. The Fed has seen some pickup in factory activity, and household spending has recovered about half of its losses. Also, about one-third of the lost jobs have been regained. He added that some aspects of the economy, like housing and motor vehicles sales, look much stronger.
The Fed announced that it will maintain seven of its emergency pandemic lending facilities open to applications for an additional three months. The Fed was previously planning on a September 30th closing date for the facilities, meaning that companies or banks that want access to Fed liquidity now have until December 31st to apply. Basically, the Fed is doing whatever it can to provide liquidity in this situation for as long as it takes to get through the crisis.
Powell had a very passionate message for Congress, urging for more fiscal stimulus. He credited the first round of fiscal relief from Congress as being quite successful. He went on to add that even if the economy’s reopening strengthens, industries that involve density (like restaurants and bars) have a long and difficult path ahead of them, and many workers in these industries will be permanently unemployed and forced to seek new jobs. Permanent unemployment has continued to be a consistent concern for the Fed.
Pending home sales surge
Pending home sales increased 16.6% on a monthly basis in June and are up on an annual basis, rising 6.3% since June 2019, according to the National Association of Realtors (“NAR”). This is the second straight month of increases in contract activity.
The NAR has raised it’s forecast for the housing market due to the residential real estate market’s stronger than estimated turnaround. For 2020, NAR now sees existing home sales declining by 3% and new home sales rising by 3%. Their previous forecast for existing home sales in 2020 called for a drop of 7.7%, with new home sales up by 1%.
This stands out, as pending home sales are a leading indicator of residential activity. The Pending Home Sales Index generally leads existing home sales by a month or two.
While the U.S. economic recovery flattened in July due to the spike in virus outbreaks, housing has provided key support and cushion in the economy. Tailwinds in this important sector are a positive economic signal.
Fiscal policy and the November 3rd elections
After passage in late March of the Cares Act, the largest U.S. stimulus package in modern history, federal government spending and investment increased an annualized 2.7% as non-defense outlays surged at a 39.7% pace, the most since 1967. State and local spending declined at a 5.6% pace amid plummeting tax revenues.
Crucial fiscal lifelines during the pandemic, like the extra $600 in weekly unemployment benefits, are expiring at a time when the economic recovery is showing signs of teetering. Lawmakers are currently debating another stimulus package to support businesses and the unemployed, but the timing of any new relief bill is unclear. The Senate needs to come to an internal agreement before reaching out to the House for a Congressional deal. Support from Congress has buoyed the economy in recent months, and further fiscal action will be crucial in determining the path of the recovery, along with continued monetary support by the Fed.
With elections only three months away, American voters will have to decide whether to re-elect President Donald Trump to a second term against a backdrop of the virus-induced recession and his responses to the health and economic crises. Trump trails Biden nationally by more than 8 percentage points in some polling indices, which also show him behind in key battleground states such as Arizona, Florida, Michigan, North Carolina, Pennsylvania, and Wisconsin.
Trump has raised the idea of delaying the November 3rd elections until after the coronavirus pandemic eases, suggesting that mail-in voting will be subject to fraud, while declining to say whether he would accept the results if he were to lose. Moving the election date is clearly something he alone cannot accomplish without an act of Congress, which is unlikely to even be considered. Elections in this country have always been held on time during other episodes in American history that caused major disruptions, such as the Civil War, the Spanish Flu pandemic, and World War II.