The US economy is struggling with a massive decline of 32.9% in the second quarter, according to GDP, and points to a long-term recovery
The numbers: An economy hard hit by the coronavirus shrank at a record 32.9% year-on-year in the second quarter, underscoring the size of a hole the US is in as it struggles to recover from the deepest recession in American history.
The tidal wave of damage from the first global pandemic in a century was almost as bad as Wall Street expected. Analysts surveyed by MarketWatch had predicted a 35% drop in gross domestic product, the official scorecard of the US economy.
The economy started to recover in mid-May after a severe contraction at the beginning of the quarter, but the US is a long way back, analysts say. Millions of Americans are still out of work, thousands of companies have closed, and many of the companies that remain open have had to scale down their activities due to the lukewarm question or continued government restrictions.
The recent wave of coronavirus cases in about half of the US states, particularly large states such as Texas, Florida and California, has also been hit by a fragile economic recovery.
Read:Consumer confidence declines in July and indicates a stronger economic recovery
Previously, GDP had not shrunk by more than 10% year-on-year in any quarter since the government began tracking shortly after World War II.
What happened: Consumer spending, the main driver of the economy, contracted in the spring with a record 34.6% year-on-year.
The decline was particularly strong in services – travel, tourism, medical care, dining out and the like. Companies that depend on large groups of customers and heavy shopping traffic suffered from the government closings after the pandemic broke out. Expenditure on services decreased by 43.5% annually.
Households also spent much less on goods, although the decline was not as strong. Purchases fell by 11.3%. Americans bought more cars, groceries, and certain other household items with a lot of work from home, but sales of clothes, gasoline, and many other goods all fell sharply.
Business investment also stumbled badly as companies stalled or drastically cut spending. Infrastructure spending, such as oil rigs, decreased by 35%, while equipment spending fell by 37.7%. Both are record declines.
Investments in new homes have also shrunk by 38.7%, but they seem to have come back quickly. Record high mortgage rates have spurred a wave of new home sales and prompted builders to ramp up construction by the end of the quarter.
Inventory levels also shrank as much as $ 234.6 billion annually in the second quarter, compared to a decline of $ 80 billion in the first quarter.
Companies cut production because sales fell and exports fell. That also weighed heavily on the economy, although production has risen in recent months after the economy had largely reopened.
Government spending was a mixed bag. The federal government joined in with massive infusions of support for businesses, households and the unemployed, but states and municipalities have suffered a sharp drop in tax revenues, even though costs have increased.
Total government expenditure rose by 2.7% in the spring. Federal spending increased by more than 17%, offsetting a 5.6% drop in state and local spending.
International trade was a smaller brake on the economy. Exports declined by 64% in the second quarter, decreasing imports by 53%. The coronavirus caused massive disruptions in the flow of world trade, and a global economic slump resulted in much less demand.
Read:The US trade deficit in goods will fall by 6% as exports recover, but the big picture is still ugly
It may take months or even years for trade to fully recover, economists say, especially with the U.S. and China still at odds with some issues. The two countries have the world’s largest economies.
In contrast, the inflation rate fell in the second quarter at a rate of 1.9% after an increase at the beginning of the year. The costs of many goods and services have fallen as companies have cut prices to try to boost sales. Inflation is likely to remain low until the pandemic subsides.
Looking back at the first quarter, the originally reported 5% GDP decline was unchanged. The pandemic struck at the beginning of March and caused a huge hole in the economy in the last month of the quarter.
Big picture: The economy is poised to grow in the third quarter, but the wave of coronavirus cases in many US states has already taken some air out of the recovery. Economists surveyed by MarketWatch predict GDP to grow by 18% annually from July to September, although estimates are likely to be revised.
The path of recovery depends heavily on whether Congress is again approving a massive aid package, economists say, and whether the pandemic is being brought back under control. Long-term uncertainty will only cause Americans to save more and spend less, damaging the economy.
What do they say ?: “The virus is in charge,” said business economist Robert Frick of the Navy Federal Credit Union. “The longer this takes, the greater the damage.”
Market response: The Dow Jones Industrial Average DJIA,
and S&P 500 index SPX,
would open lower on Thursday. Shares have been trading in a narrow range in recent weeks.