U.S. gross domestic product (GDP) growth collapsed in the second quarter of 2020, according to data out this morning from the Bureau of Economic Analysis. Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), decreased at an annual rate of 32.9 percent in Q2. That was a slightly smaller decline than expected but still the sharpest post-WWII downturn ever recorded. It is important to remember that this headline figure is annualized, meaning that the economy did not actually shrink by 32.9 percent last quarter but instead 9.5 percent from Q1. That is of course still a severe drop in output and for additional context, GDP fell only 4 percent during the entirety of the Great Recession.
The weakness in Q2, though, was also expected considering that nearly every sector of the U.S. economy was clobbered by the coronavirus crisis and accompanying containment measures. Moreover, the 32.9 percent SAAR decline would only be realized if growth remained as weak during the subsequent three quarters as it was in Q2. We know this is not the case because the destructive lockdowns started to be lifted across most parts of the country in May (which probably helped lessen the second quarter’s decline) and incoming data ever since have generally supported our April call that the economy had likely already bottomed. In fact, early projections from the Federal Reserve Bank of New York already see GDP rebounding by 13.31 percent in Q3. There are of course risks to this outlook, such as the “second wave” of the COVID-19 outbreak, and recent jobless claims figures indeed confirm that the recovery has likely lost a bit of momentum due this uptick in cases. The Conference Board’s consumer confidence index similarly deteriorated this month, with optimism falling the most in the “hot spot” states (see below), but there have also been some encouraging signs recently that the rise in positive cases is starting to plateau. Altogether, the U.S. economy remains prime to rebound but it will be hard for the recovery to gain any momentum until the spread of the coronavirus is under control. As the Federal Reserve correctly emphasized in yesterday’s monetary policy statement, “the path of the economy will depend significantly on the course of the virus.”
Sources: Econoday, U.S. DoL, Wells Fargo, J.P. Morgan, FRBSL