GDP fell at an annual rate of 32.9% in the second quarter amid the COVID-19 crisis
Rebecca Davis, who owns two women’s fashion boutiques in Franklin, Tennessee, says revenue reached about 85% of normal levels when it reopened in late April after being closed for six weeks amid the pandemic of coronavirus.
But sales slowed further and further in June and July, a decline which she said could be in part due to peaks in COVID-19. In recent weeks, Tennessee has broken daily records for coronavirus cases and Williamson County has started requiring people to wear masks in public.
This month, she estimates, sales are down about 30% from a year ago and she’s just about to break even, but believes better times are ahead.
âIt’s been tough for several months,â says Davis, who used a federal conditional loan to retain his 12 employees. “I’m just glad to be open.”
Business owners like Davis are struggling to get out of a huge hole in the economy, laid bare Thursday in a government report showing the country’s gross domestic product contracted at a seasonally adjusted annual rate of 32 , 9% in the second quarter, its worst performance ever. .
But even as the economy takes two steps forward, outbreaks of infection in much of the country have pushed it back.
The flashback was illustrated in a separate report that found the number of Americans filing initial unemployment claims – a rough measure of layoffs – last week rose to 1.42 million, the second consecutive weekly increase after 15 weeks drop. A staggering 54.1 million workers have applied for unemployment benefits since March.
Most of this turmoil in the labor market occurred during the sharp fall in the economy during the April-June period. The free fall was sparked by a historic 34.6% drop in consumer spending as states closed restaurants, malls, movie theaters and other outlets, and Americans avoided shopping venues. gatherings and travel for fear of contagion. Almost all sectors of the economy have been affected, including business investment, housing, trade and government spending.
“The GDP figures are staggering,” said Ian Shepherdson, chief US economist at Pantheon Macroeconomics.
The contraction follows a 5% drop in economic output in the first quarter.
But the country’s steepest recession is also set to be its shortest, with consumer spending, job growth and other key metrics rebounding sharply in May and June as states begin to allow businesses to reopen. in phases and that many employees have been rehired.
About $ 2.5 trillion in federal government assistance also supported spending, including forgivable loans to small businesses that have held or brought back workers, as well as $ 1,200 checks to individuals and a supplement. $ 600 to weekly state unemployment benefits.
Every state was hit in the last quarter, although those heavily dependent on travel and tourism, like Hawaii and Nevada, were hit hardest by the recession, according to employment figures analyzed by economist Adam Kamins from Moody’s Analytics. Michigan, the heart of the nation’s auto industry, has come under fire as consumers postponed car purchases. And the densely populated northeastern states hit by the most severe virus outbreaks – like New York, New Jersey and Massachusetts – have absorbed the heaviest economic losses as governors shut down earlier and residents stayed at home.
Meanwhile, more rural states with less virulent epidemics, such as Idaho, Utah, Oklahoma, Arizona and Nebraska, were more immune to economic damage, Kamins said. These patterns are now largely being reversed, with initially lax states experiencing outbreaks of COVID-19.
Recent increases in coronavirus cases across much of the South and West have led at least 20 states to suspend or cancel plans to reopen, hampering the recovery expected in the second half of the year. The number of hours worked in states like Texas, Florida and Arizona recently declined, according to Homebase, an employee scheduling software provider.
After the country recovers about a third of the 22 million jobs lost at the start of the crisis in May and June, some of those gains could be wiped out in July with millions of jobs cut, economist Kathy said Bostjancic of Oxford Economics.
Many analysts still expect the hotspot states to resume reopening after epidemics are brought under control over the next month, helping the U.S. economy rebound and avert another recession. Scott Anderson, chief economist at Bank of the West, estimates the economy will grow 17.3% annually in the third quarter and 4.9% in the fourth quarter, assuming Congress passes another stimulus package from $ 1,500 to $ 2,000 billion.
With some companies shutting down permanently and millions of workers permanently laid off, Barclays estimates that the country’s economic output will not return to its pre-pandemic level until early 2022. And Moody’s Analytics estimates that a return to levels of pre-pandemic job will not come. until 2023.
âOur business is thin to zero right now,â said Michael Vander Hook, president of Freight Motion, a broker for truck shipments.
But Vander Hook said his business saw revenue drop 90% in April from a year ago before rebounding modestly in May. Yet it remains 70% below levels of a year ago.
Suppliers, he says, ship food to grocery stores, but not many other products. And with many small businesses going bankrupt, he sees little prospect of a noticeable recovery in the months ahead. Vander Hook used a federal loan to retain three of the five employees he had before the pandemic, but won’t be able to keep them without a business recovery or additional federal help.
âI can’t run at 30%,â he says.
Consumer spending collapses
Consumer spending fell 34.6%, the largest decline on record, after falling 6.9% in the first quarter. State closures and fears of contagion from Americans, combined with massive layoffs, have prompted buyers to suspend much of their discretionary spending.
Consumption represents about 70% of economic activity.
Business investment reservoirs
Business investment fell a record 27% after falling 6.7% in the first quarter. The culprits were the closures of businesses and factories, as well as uncertainty over the economic effects of the epidemic. Spending on equipment such as computers and factory equipment fell 37.7%, while spending on buildings, oil rigs and other structures fell 34.9%.
Companies are reducing their inventories
Instead of increasing their inventories, companies tapped into existing supplies to meet falling demand, contributing nearly 4 percentage points to the decline in GDP.
Residential investment plunges
Home construction and renovation broke a string of three straight quarterly increases, falling 38.7%. Despite historically low mortgage rates, the epidemic has put construction projects on hold and has caused homebuyers to sit on the sidelines.
Overall, however, housing is the biggest bright spot in the economy, with housing starts rebounding strongly in May and June after falling in March and April as lower mortgage rates attracted buyers.
Public spending is increasing
Government spending was the biggest positive for the economy, as federal spending jumped 17.4%, supported in part by stimulus measures. The increase more than offset a 5.6% drop in state and local government spending amid lower taxes and other income and school closures.
Trade helps growth
U.S. exports fell 64.1%, hammered by tighter overseas shutdowns than in the United States, while imports fell 53.4% ââas Americans drastically cut spending amid the closures.
As the decline in imports more than offset the decline in exports in absolute terms, the country’s trade gap narrowed, contributing slightly to economic growth.
At the end of the line
The economy is already on the mend but faces a torturous comeback amid outbreaks of the virus in parts of the country and the risk of a second wave of COVID-19 in the fall. A stronger rebound in consumer spending is not expected until a vaccine is available next year and Americans have emboldened themselves to travel and spend freely.
Even then, deep bruises will persist because of permanently laid-off workers struggling to find new jobs or retire, and businesses that never reopen.
“We predict that it will take years for this damage to be fully reversed,” said Andrew Hunter, senior US economist at Capital Economics.