It’s official. America lived through the deepest downturn in the history of modern economic statistics during the second quarter.
The US economy contracted an annualized 32.9% over the period, a bit less than the median estimate of -34.5%.
The unprecedented nature of the circumstances created considerable ambiguity around the report, which comes on the heels of a 5% contraction in the first quarter. The error bands were wide (the range was -40% to -25% from 73 economists), so the market was ostensibly prepared for pretty much anything other than a large upside surprise, which wasn’t forthcoming.
As expected, the underlying numbers are bleak.
Personal consumption (which was already decelerating headed into the pandemic and which shrank nearly 7% in the first quarter) plunged an annualized 34.6%. That is a dubious record that will leave an indelible mark on the charts for all eternity.
Consumption accounts for two-thirds of GDP, and at the risk of overstating the case, failure to extend unemployment benefits would severely undermine the recovery given how crucial transfer payments were in replacing lost incomes.
Jobless claims rose a second week, data out Thursday showed, an ominous sign as states delay re-opening plans in the face of new virus outbreaks.
As I put it several months back, debates about whether the consumer can continue to shoulder the burden in an economy where business investment is weak have been rendered irrelevant. The game has totally changed. Now, the question is whether (and to what extent) the coronavirus experience has forever altered consumer psychology.
Q4 2019 marked the first time since 2009 that nonresidential fixed investment fell in three consecutive periods. Revisions appear to have altered the picture a bit, but it obviously dropped again in Q1. In the second quarter, business investment tumbled 27%.
Capex is seen plunging this year (along with buybacks), as corporate management teams rein in spending and hoard cash amid the downturn.
Sales to domestic purchasers (ex.-government) dropped 33.7% in Q2 after a 5.8% dive in the first quarter.
This is another area where the economy was on somewhat shaky ground coming into the worst demand shock since the Great Depression. The gain was meager in the fourth quarter of 2019 (the least in four years, in fact), and now we’re off the proverbial cliff.
Core PCE QoQ dropped -1.1% during the period, after rising 1.6% in the prior quarter.
And so, the deepest downturn since the Great Depression is on the books. The figure (below) will live in infamy.
This leaves economists (and non-economists) to forecast the shape of the recovery.
Although there are “consensus” estimates for the quarters ahead (see figure below), there is no real “consensus”, precisely because everyone is flying almost totally blind in the face of surging virus cases across the Sun Belt.
The Fed is vocally skeptical about the prospects for a “V-shaped” recovery. Pessimists warn of deep structural damage to come, even if the third quarter sees the kind of steep rebound that’s currently baked into many forecasts.
As Jerome Powell put it Wednesday, “even if the re-opening goes well, it’s still going to take a fairly long time for parts of the economy” to get back to normal.
He specifically mentioned the hardest-hit sectors, like retail and food and beverage.
“Many of the people who were laid off from those industries are going to find it hard to go back to –”, Powell paused, before abandoning pretensions to politeness. “There won’t be any jobs for them”, he said, flatly.