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U.S. gross domestic product contracted at a 32.9% annualized pace in the second quarter, the steepest drop in records dating to 1947. We knew that was coming. Perhaps more worrisome are signs that a quick recovery is starting to slow. Greg Ip and Jeff Sparshott here with a look at today’s data.
KEY THEMES
A Health-Led Recession in More Ways than One
After its sheer magnitude, the most remarkable thing about the second-quarter drop in gross domestic product was the role of services. Of the 32.9% decline, personal services spending contributed 22.9 percentage points and of that, health care accounted for 9.5 points. This is very unusual: Services, and health care in particular, are usually the most stable part of GDP. Health-care spending expanded in every quarter of the 2007-09 recession. The “good” news is that this was not voluntary: Even as Covid-19 spending rose, this was more than swamped by people who couldn’t, or wouldn’t, visit the dentist or get elective surgery. As lockdowns are lifted, health spending should bounce back, along with health-care jobs. That is less likely for recreation services and food and accommodation which together contributed roughly 10 points to the GDP drop. Even once people can return to amusement parks and restaurants, it’s not clear they’ll have the income or inclination to.
Saving Grace
Personal incomes jumped. One-time stimulus payouts and unemployment benefits lifted incomes, boosted saving rates and helped keep households afloat. Real disposable personal income—which accounts for taxes and inflation—increased at a 44.9% annual pace.
And personal saving rose to $4.7 trillion annualized in the second quarter, up $3.5 trillion from the fourth quarter of 2019. The personal saving rate hit 26%. This means the hit to people’s incomes from job losses was more than offset by government stimulus payments, thereby preserving personal spending power. That provides a cushion if there’s no new stimulus bill for a while. One warning: Congress hasn’t approved another round of stimulus payments and the clock on emergency federal unemployment benefits runs out tomorrow.
Head Fake
The steep decline in the second-quarter GDP report is a bit misleading insofar as we know from monthly data that all of the contraction occurred in April and output then rose sharply in May and June. Now that we’ve entered the third quarter there are troubling signs things have stalled out. Yet that may not be apparent when third-quarter GDP is released in late October. That’s because even if GDP doesn’t grow at all in July, August or September, the third quarter level would still have grown 17% (annualized) from the second quarter, according to IHS Markit estimates that preceded Thursday’s report.
GDP growth figures are routinely annualized, which exaggerated the hit in the second quarter. GDP actually fell 9.5% in the second quarter. If it declined at the same rate for a full year, that would equal 32.9%, but it almost certainly won’t. Ultimately, it could make more sense to look at GDP levels rather than rates of change. That will show how far the economy has fallen and how far it has to go.
Signs of a Slowdown
Separate data out today showed applications for unemployment benefits rose by a seasonally adjusted 12,000 to 1.43 million for the week ended July 25, the second weekly increase in a row. Filings for unemployment benefits have eased since late March but remain at historically high levels and are trending in the wrong direction.
Private-sector data is pointing in the same direction—a rise in Covid-19 cases corresponds with a slowdown in the recovery. Credit card transactions, mobility data, small business statistics, the number of people flying on airplanes and restaurant bookings have largely plateaued or gone into reverse.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ECONOMISTS ARE SAYING
“A healthy third quarter rebound is not a foregone conclusion unless unemployment and Covid-19 are brought under control.” —Robert Frick, Navy Federal Credit Union
“We expect it will take years for that damage to be fully reversed.” —Andrew Hunter, Capital Economics
“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.” —Jim Baird, Plante Moran Financial Advisors
“Monthly data suggest that GDP should bounce in Q3. However, uncertainties related to the pandemic continue to cloud the outlook later this year.” —Jay Bryson, Wells Fargo
“The second-quarter GDP report provides us with an essential perspective on the economic contraction brought on by the Global Coronavirus Recession (GCR), but it tells us little about where we stand today and where we’re likely to head tomorrow.” —Gregory Daco
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