Market participants prepare for Thursday’s second-quarter Gross Domestic Product (GDP) report to show the worst contraction in US economic activity in the post-World War II era, after the Coronavirus pandemic forced business closings and disrupted daily activity for much of April through June.
Here are the main metrics expected from the Economic Analysis Bureau’s second-quarter advance GDP report, to be released Thursday at 8:30 am ET, compared to consensus estimates compiled by Bloomberg:
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Annualized Q2 GDP, quarter by quarter: -34.5% expected vs. -5.0% in Q1
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Q2 Personal consumption: -34.5% expected vs. -6.8% in Q1
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Basic expenses for personal consumption, quarter after quarter: -0.9% expected vs. 1.7% in Q1
If GDP reaches an annualized contraction of 34.5% as expected, it would mark by far the worst decline on record, according to data from the Office of Economic Analysis dating back to 1947. Before the pandemic, the worst recorded impression of GDP was the first quarter of 1958, when GDP fell 10.0% annualized.
U.S. economic activity contracted 5.0% in the first quarter of 2020, which captured just the start of the coronavirus pandemic and the close of business in March.
Estimates for the margin of decline in GDP for the second quarter covered a relatively wide range. At the low end, several economists expected GDP to sink as much as 40%. At the high end, Mizuho Securities economists estimated that GDP decreased 25% in the second quarter. According to Wednesday’s estimate, the Atlanta Federal Reserve’s GDPNow tool closely watched a 32.1% decline in second-quarter GDP.
Consumer-driven decline
The second-quarter precipice in economic activity was fueled by a drop in consumer spending, which is expected to appear as a 34.5% drop in the personal consumption metric in Thursday’s report. Consumer spending comprises about two-thirds of the United States economy, and prior to the pandemic it had been the main driver of economic growth.
But spending declined during the second quarter, and companies were forced to close from mid-March to adjust to the social drift due to the coronavirus outbreak. Retail spending sank a record 14.7% in April, according to the Commerce Department, before picking up in each of May and June.
“In contrast to previous recessions, where investment and inventories have been the main drivers, the fall in the coronavirus has been mainly the result of an unprecedented collapse in consumption, as the closure measures imposed in late March forced consumers to stay at home, “Ian Shepherdson, chief economist at Pantheon Macroeconomics, said July 24.
“Commercial and residential investments also declined, but the overall decline is likely to have been relatively modest,” he added. “Meanwhile, despite the huge fiscal stimulus, the vast majority of those funds were transfers to individuals and businesses, and, with state and local government spending contracting in the face of budget deficits, government spending was probably a small negative factor for growth”.
NEW YORK, NEW YORK – JULY 1: A woman in a mask walks past the ‘Store Closure’ and ‘Nothing Retained’ signs. (Photo by Alexi Rosenfeld / Getty Images)
The sharp contraction in activity across all sectors in April and early May is likely to have outpaced any initial rebound at the end of the quarter, when shutdown measures eased and supply chains and businesses came back online. Data released in recent months showed that new home construction plummeted more than ever in April before increasing in May and June. And shipments of basic capital goods, which are used to calculate equipment spending in GDP, followed a similar trend, falling 6.4% in April before increasing 1.6% in May and 3.4% % in June.
“With delays in construction projects and home buyers remaining on the sidelines during the early stages of the pandemic, residential investment probably declined markedly in the second quarter despite the strong rebound towards the end of the quarter,” they said. Nomura economists led by Lewis Alexander in a note. . “Both imports (-44.9%) and exports (-67.7%) collapsed in the second quarter amid sharp declines in internal and external demand. The larger drop in exports probably led to a substantial drag on growth in net exports. “
With the close of July, and with many states struggling to contain a resurgence in coronavirus cases, several economists noted that the pace of recovery in the second quarter may be slower than the rapid rebound that some had anticipated.
“While the initial pickup in monthly activity was stronger than expected, the recent flattening in the high-frequency indicators suggests a more gradual recovery rate from here,” said Alexander.
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