'Historic' can work both ways
Bottom line Second quarter U.S. gross domestic product (GDP) plunged 32.9% quarter-over-quarter annualized (-9.5% non-annualized), marking the single largest economic contraction since record-keeping began for this metric in 1947. The carnage was paced by significant declines of 35.6% in personal consumption, 27% in nonresidential fixed investment, 38.7% in housing and a massive liquidation of $315.5 billion in inventories. On the positive side of the ledger, net trade actually added to GDP and federal government consumption rose 17.4%, offsetting a 5.6% decline in state and local spending.
“The Great Shutdown” to prevent the spread of the coronavirus pushed the U.S. economy into a deep recession that started in February, according to the National Bureau of Economic Research (NBER). GDP now approximates $19.41 trillion in current dollars, sequentially down nearly 10% from the first quarter’s $21.56 trillion.
Today’s abysmal flash was actually better than the Bloomberg consensus at -34.5%, the Blue Chip consensus at -33.6% and the Atlanta Fed’s GDPNow forecast at -34.7%. Our more constructive call was for a -24.3%, as we are anticipating directionally positive upward revisions in August and September.
With much of discretionary retail closed since mid-March, personal consumption (accounting for 70% of GDP) plunged 34.6% in the second quarter (the steepest decline on record), accounting for a 25.05 percentage-point decline in GDP. But retail sales rebounded sharply in May and June, a trend we believe will fuel an upward revision in the next two months.
Corporate capital spending fell 27% across the board, its steepest decline since 1952, subtracting 2.62 percentage points from GDP. Housing plummeted 38.7% in the second quarter, its worst result since 1980, shaving another 1.76 points.
But new home sales surged in May and June to a 13-year high due to record-low mortgage rates, which should contribute to an upward revision of GDP. Manufacturing bottomed in April, but has already started a sharp ascent. And the pace of inventory accumulation plunged by a record $315.5 billion in the second quarter, nearly quadrupling the first-quarter decline of $80.9 billion, which subtracted 3.98 percentage points from overall GDP. This depleted inventory will need to be replenished at some point during the second half of 2020, which should contribute to a strong expected rebound.
Although exports and imports both declined during the second quarter, the narrowing of the trade deficit added 0.68 percentage points to GDP. The weaker dollar should help to boost exports in the third quarter. Finally, massive fiscal policy stimulus in the wake of the coronavirus boosted nondefense federal government transfer payments to individuals and businesses by 39.7% during the second quarter, which more than offset the 5.6% decline in state and local spending. As a result, net government spending rose 2.7% in the second quarter, collectively adding 0.82 points.
With the sharp economic recovery we experienced in May and June, we continue to believe that the NBER will eventually date the end of this deep but short recession during the second quarter. We are forecasting a powerful GDP gain of 15.5% in the third quarter, while the Blue Chip is estimating an even stronger 17.7% surge.
To be sure, we’ll be watching a number of important developments in coming months to gauge the current pace of this powerful economic recovery:
- The second-wave spike in infections in the so-called FCAT states (Florida, Southern California, Arizona and Texas) since late May appears to have peaked in recent weeks, while deaths remain low.
- Rapid progress in vaccine development could have one or more drugs available for emergency use by the fourth quarter of 2020.
- Congress is engaged in negotiations over its proposed Phase 4 fiscal stimulus plan, which could successfully conclude during early August.
- Initial weekly jobless claims have actually risen sequentially over the past two weeks, after 15 consecutive weeks of declines, which could indicate that the pace of improvement in the labor market is plateauing.
- We’re now less than 100 days away from the contentious November presidential election, with important fiscal-policy implications for economic and corporate profit growth in 2021 and beyond.