The US experienced the worst economic downturn in the second quarter since the government began tracking after World War II. How much? Try 30% or more.
Economists surveyed by MarketWatch estimate that gross domestic product – the official scorecard for the U.S. economy – shrank at an annual rate of 34.6% from early April to late June.
Before the coronavirus pandemic, the largest decrease in recorded GDP in 1958 was 10%. The government’s quarterly GDP figures go back to 1947.
The strongest quarterly decline during the Great Recession 2007-2009 was 8.4%.
Here’s what you should look at in the Q2 GDP report when it is released Thursday morning.
The loss of tens of millions of jobs and the shutdown of countless businesses during the early stages of the pandemic caused enormous shock to the families. The amount spent by consumers is likely to drop by a record 35%, according to Wall Street DJIA,
Consumption represents about 70% of the US economic activity. The unprecedented decline in expenditure is expected to account for the bulk of the decline in GDP.
Service spending was the worst. The trip dried up, fewer people went to the doctor or dentist for regular care, dining inside restaurants was prohibited, and people couldn’t get haircuts, among other things.
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Americans also spent less on cars and many other goods, but bought more household staples, such as groceries and paper products, to bypass them from home.
Businesses reduced their investment and production in the second quarter when they faced an unfathomable collapse in domestic and foreign demand.
Energy producers in particular were hit hard by a massive drop in oil prices, as drivers stayed off the road and air traffic crumbled. Investments in structures such as oil rigs and equipment such as computers and heavy machinery likely shrank by about 40% or even more.
Inventories also saw a major decline as manufacturers and other companies cut production. A fall in the stock level also causes GDP to shrink.
Businesses will not ramp up their investments and production until the last wave of coronavirus cases disappears and world trade recovers from massive disruption.
Weak investments will not only hurt the economy now, they will also make it harder to accelerate growth in the future once the virus starts.
Washington has pledged to spend trillions of dollars to keep the economy from sinking into an even deeper precipice.
Nevertheless, it is quite possible that government expenditure also fell in the second quarter. Not all federal aid has yet entered the economy, and states and municipalities have suffered from a massive drop in tax revenues, even though their expenditures have risen to fight the damage caused by the virus.
Exports and imports
Chronically high US trade deficits didn’t look all that different during the pandemic, but it’s primarily a statistical illusion. Imports have fallen, but so have US exports.
In short, world trade is on its knees.
The result is a further brake on the economy in the second quarter if, as expected, exports fall faster than imports and lead to a slightly larger deficit. Higher deficits subtract from GDP.