According to the Advance Estimate by the Bureau of Economic Analysis (BEA) on Thursday morning, US real gross domestic product (GDP) contracted at an annual rate of 32.9% in the second quarter.[1], [2] This drastic shrinkage marks the worst GDP report in American history, outpacing the previous record (10% in 1958) by more than three times.[3] While the Advance estimate is subject to further revision (the BEA’s complete report is set for release on August 27th, 2020), such a degree of decline is a testament to the uncertainty of the coronavirus economic landscape, especially as the national death toll surpasses 150,000 and virus containment in states such as California, Texas, and Florida worsens.[4]
While this decrease in real GDP reflects slow activity in exports, investments, and state/local government spending, the decrease is particularly contingent on decreasing personal consumption expenditures. Because of both lockdown and job loss, overall consumer spending is down 34.6% annualized this spring. Consumer spending on services fell 43.5% at an annual pace, due to industries such as health care, travel, tourism, and restauranting becoming less safe and affordable. While not as severe, household good purchases dropped 11.3%.[5] Such a decrease in spending demonstrates that Americans are still concerned with their financial well-being and prefer to save rather than spend. With the Labor Department reporting an additional 1.43 million initial jobless claims last week (an increase of 12,000 from the previous week), such concerns are somewhat valid. [6]
While forecasts are certainly pessimistic, the introduction of the Health, Economic Assistance, Liability Protection, and Schools (HEALS) Act to the Senate floor indicates that an additional $1 trillion in federal relief is coming soon.[7] As the law provides an additional stimulus check and unemployment benefits as well as small business loans, it may increase consumer sentiment and provide a much-needed jumpstart to the economy. Given the uncertainty of the coronavirus environment, investors should not panic, but rather stay particularly attentive to market fluctuations and any new relief legislation in the coming weeks.
Craig J. Ferrantino is a Registered Representative offering Securities and Advisory Services through UNITED PLANNERS FINANCIAL SERVICES, Member FINRA, SIPC. Craig James Financial Services, LLC and United Planners are not affiliated.
[1] Note that while GDP swings are typically referred to as annualized, estimates reflect real change from the previous quarter at an annual rate, seasonally adjusted. In other words, the 32.9% decline is in comparison to the annualized rate from Q1, seasonally adjusted. When compared to the economy in Q2 of 2019, the 2020 Q2 economy is 9.5% smaller.
[2] “Gross Domestic Product, 2nd Quarter 2020 (Advance Estimate) and Annual Update.” Bureau of Economic Analysis. 30 July 2020. <https://www.bea.gov/news/2020/gross-domestic-product-2nd-quarter-2020-advance-estimate-and-annual-update> Accessed 30 July 2020.
[3] Bartash, Jeffry. “U.S. Economy Suffers Titanic 32.9% Plunge in 2nd Quarter and Points to Drawn-Out Recovery.” 30 July 2020. <https://www.marketwatch.com/story/economy-suffers-titanic-329-plunge-in-2nd-quarter-gdp-shows-and-points-to-drawn-out-recovery-2020-07-30> Accessed 30 July 2020
[4] Wise, Alana. “More than 150,000 People Have Died From the Coronavirus in the U.S.” NPR. 29 July 2020. <https://www.npr.org/sections/coronavirus-live-updates/2020/07/29/896491060/more-than-150-000-people-have-died-from-coronavirus-in-the-u-s> Accessed 30 July 2020.
[5] Bartash, Jeffry. “U.S. Economy Suffers Titanic 32.9% Plunge in 2nd Quarter and Points to Drawn-Out Recovery.” 30 July 2020. <https://www.marketwatch.com/story/economy-suffers-titanic-329-plunge-in-2nd-quarter-gdp-shows-and-points-to-drawn-out-recovery-2020-07-30> Accessed 30 July 2020.
[6] “Unemployment Insurance Weekly Claims.” U.S. Department of Labor. 30 July 2020. <https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20201487.pdf> Accessed 30 July 2020.
[7] Mercado, Darla. “GOP Heals Act gives some businesses a second shot at Paycheck Protection Program.” CNBC. 30 July 2020. <https://www.cnbc.com/2020/07/30/gop-heals-act-gives-some-businesses-a-second-shot-at-ppp-loans.html> Accessed 30 July 2020.