The unprecedented collapse that the U.S. economy suffered in the second quarter as the COVID-19 pandemic gripped the nation will be laid bare Thursday, with a report projected to show a record 35% annualized drop in gross domestic product.
As states shut down restaurants, stores, factories and other businesses to contain the virus’s spread, nearly every corner of the economy was hammered, analysts say, including consumer spending, business investment, housing, trade and government outlays. Gross domestic product, or GDP, represents all goods and services produced in the country.
“Really, you’re going to see just godawful numbers just across the board,” says Scott Anderson, chief economist of Bank of the West.
The nation’s steepest-ever recession is also expected to be the shortest, with job growth, consumer spending and other key measures bouncing back sharply in May and June after bottoming in April as states began allowing businesses to reopen in phases and many employees were rehired. But spikes in coronavirus cases across much of South and West have prompted at least 20 states to pause or roll back reopening plans, dampening the anticipated recovery in the second half of the year.
Some economists cite growing risks of the nation slipping back into recession later this year. The Federal Reserve, which concludes a two-day meeting Wednesday, is expected to keep its key interest rate near zero.
The economy’s partial backslide is expected to be underscored by Thursday’s report on last week’s initial jobless claims, a rough measure of layoffs. The number of claims is projected to rise by about 15,000 to 1.43 million, according to a Bloomberg survey, the second straight increase after 15 weeks of declines.
Although the grisly GDP numbers in the April-June period have long been expected, a figure on Thursday that’s noticeably better or worse than the median 35% decline predicted by economists polled by Bloomberg could shed light on the length of the recovery.
“The magnitude of the decline will tell us about the size of the hill the economy needs to climb to get back to pre-Covid levels,” says Jonathan Millar, deputy chief U.S. economist at Barclays.
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Anderson, however, notes that the figures are so large they could be subject to substantial revisions.
Consumer spending likely plunged
Consumer spending, which makes up about 70% of economic activity, is likely to account for the bulk of the second-quarter free-fall as state shutdowns and Americans’ contagion fears prompted them to close their wallets. Anderson expects a 36% plunge in consumption.
Business investment, he reckons, tumbled 32% as companies reined in spending on new equipment and structures amid factory closures and widespread uncertainty about the outbreak’s economic effects. And instead of adding to their stockpiles, firms likely drew down inventories to meet whatever demand existed, lopping 3.6 percentage points off annualized GDP, Wells Fargo estimates.
Housing construction and renovation offered a bright spot during the economy’s 5% first-quarter contraction as a result of historically low mortgage rates, but the sector won’t be spared in the April-June period, experts say. Construction delays and the tendency of home buyers to stay on the sidelines in the early days of the pandemic probably led to a sharp pullback in residential investment, says Nomura economist Lewis Alexander.
Trade also likely weighed on the economy. Tougher lockdowns overseas than in the U.S. likely clobbered exports, Barclays says, while imports held up fairly well because of government aid to American consumers, including enhanced unemployment benefits and $1,200 stimulus checks. That all should spell a wider trade deficit, which hurts economic growth.
Massive federal stimulus spending should make government outlays the only sector adding to growth, Barclays says. But Wells Fargo figures that boost will be more than offset by sharp declines in state and local spending as tax and other revenue sank and schools closed.
Comeback depends on virus
Better times almost certainly lay ahead, but how much better depends on the course of the outbreak. Anderson estimates the economy will grow at an annual rate of 17.3% in the third quarter and 4.9% in the fourth quarter, a prediction that depends on Congress passing another stimulus of $1.5 trillion to $2 trillion. After the historic second quarter nosedive, that still would still result in a 4.8% contraction for the year, the largest since 1946.
Yet even that forecast could be threatened by the virus surges and state rollbacks. The number of hours worked has declined in Arizona, Florida and Texas in recent weeks, according to Homebase, a supplier of employee scheduling software. Initial jobless claims, a gauge of layoffs, rose the week ending July 18 for the first time since March. And Moody’s Analytics says several million jobs could be shed in July, partly reversing the 7.5 million payroll gains in May and June, an advance that reversed about a third of the losses earlier in the spring.
Millar doesn’t expect the nation’s inflation-adjusted gross domestic product to return to its pre-pandemic level until early 2022. And Moody’s reckons a return to pre-pandemic employment levels won’t come until 2023. Both of those achievements would still leave the economy below its potential output and payrolls short of the full employment that prevailed before the crisis.
Economists point to the lingering damage from the crisis as some businesses shut down for good and some employees who were permanently laid off struggle to land new jobs.