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Q2 GDP declined by 32.9%

July 30, 2020 Blog 2 min read
Jim Baird Wealth Management
The speed at which the economy shut down in March and the magnitude of the drop was breathtaking in real time. The record-shattering decline of 33% is no less shocking on the surface, its impact mitigated only because it was expected.

7.30.20 GDP Chart

The first look at Q2 GDP revealed the devastating effect that the COVID-19 crisis had on the U.S. economy. The contraction was so severe that it easily surpassed the worst quarterly decline in modern U.S. history.

Today’s report estimate of second quarter GDP declined by an annualized rate of 32.9%, effectively eliminating one of every three dollars that would have otherwise been spent in the preceding quarter. The median estimate was for a decline of 34.5%, but with a range of estimates that was exceptionally wide, signaling the incredible difficulty in accurately estimating the impact of such a massive disruption to the economy.

The report revealed that very few areas of the economy were spared from the broad shutdowns that occurred. Of particular note, consumer spending contracted by 34.6%, particularly noteworthy given that the consumer sector represents over 60% of all spending. Outlays for services dropped by 43.5%, which isn’t surprising given social distancing and shelter-in-place mandates that prevented providers from effectively delivering a range of personal services. Consumers were able to shift the purchases of many goods to online retailers or other delivery means that limited direct contact, an alternative that wasn’t completely possible for many services.

Private investment took the largest hit, falling by nearly half with both the business and residential homebuilding segments declining sharply. With so many businesses shut down, inventories were also drawn down sharply, solely accounting for an outright four percentage points of the total decline.

Coming into today, the bad news on the economy was clear, and today’s report contained few surprises. The good news is that the sharp deterioration in economic activity during April has already quickly reversed course. Activity picked up sharply in May and June as stay-at-home orders were eased across much of the country. Fiscal programs aimed at providing supplemental income replacement for impacted workers helped to sustain demand, while various loan programs provided support for impacted businesses and governmental entities.

That sharp reversal should mean a potentially robust pickup in activity and an outsized growth rate in Q3, but overall activity is expected to remain well below pre-pandemic levels for some time to come. The scars will be with us for a while; it’s not as easy to bring the economy back online quickly as it was to shut it down. Data over the past two months had suggested that the economy was on course for a better-than-expected recovery, but more recent reports on consumer spending and the labor market have called that into question.

The economic path remains murky, but the primary risk is clear and noneconomic; the spread of COVID-19 and the significant health risk that it presents remains substantial. That unknown will keep the recovery on a somewhat fragile footing over the coming months.

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