The U.S. Economy Suffers Sharpest Downturn on Record

The U.S. economy shrank in the second quarter by the fastest rate since the government began keeping track of gross domestic product after World War II, as lockdowns aimed at curbing the coronavirus pandemic decimated economic activity and anti-police riots tore through many American cities.

Gross domestic product, or the value of all goods and services produced by the economy, contracted at a 32.9 percent seasonally adjusted annualized rate in the April through June three month period, according to the preliminary estimate from the Bureau of Economic Analysis published on Thursday. That marked the steepest drop on records stretching back to 1947 and compared with economists’ forecasts for a 35 percent decline in output.

The BEA reports the change in GDP on an annualized basis, which can exaggerate the impact of temporary and sudden shifts in the economy. Compared with both a year ago and with the first quarter of the year, GDP was down 9.5 percent.

The previous record decline on the standard, annualized basis was a 10 percent drop in the first quarter of 1958. The U.S. economy shrank at a 5 percent rate in the first three months of 2020.

Consumer spending crashed at an annualized rate of 34.6 percent in the quarter, led by a 43.5 percent annualized decline in spending on services. Consumer spending on goods fell at an annualized 11.3 percent. Private sector investment fell 49 percent, driven down by a 38.7 percent decline in residential investment, a 34.9 percent decline in commercial building investment, and a 37.7 percent decline in equipment investment.

Consumer spending on durable goods, which had been the worst hit segment of the economy in the early stages of the pandemic, declined a milder 1.1 percent.

In comparison to the year-ago period, the declines look less extreme. Consumer spending was down 10.7 percent. Spending on services dropped 14.7 percent. Spending on goods declined 1.8 percent. Private investment fell 17.9 percent.

Much of the economy was locked down during the second quarter, with only essential workers and services permitted to operate for work that could not be done from home.  Americans were under instructions to stay home or social distance when in public. State reopenings required many businesses to operate at diminished capacity, limiting the speed of any rebound.

As well, businesses in cities across the U.S. found themselves under siege as protests turned into riots and looting. Although the total number of businesses that were damaged during the Black Lives Matter riots remains uncounted, that number certainly runs into the thousands.

In a separate report also released Thursday, the Department of Labor said that 1.43 million Americans filed initial claims for unemployment benefits last week, an increase of 12,000 from the week earlier. The virus and social distancing forced millions of employers to cut payrolls, throwing tens of millions of Americans out of work, as consumers slashed spending on travel, hotels, restaurants, and many other businesses. Yet as states have reopened their economies, employers have been hiring workers back at a record pace. An additional 4.8 million workers were added to payrolls in June and the unemployment rate fell to 11.1 percent.

The U.S. Census Bureau said in its latest weekly Household Pulse Survey that 51.1 percent of households experienced a loss of employment income in the week ended July 21, up from 48.3 percent four weeks ago.

Government relief efforts, however, gave a big boost to household income in the second quarter. Despite double-digit unemployment and the crash in consumer spending, personal income increased $1.39 trillion in the second quarter. The government said the increase in personal income was more than accounted for by an increase in government benefits. After-tax personal income increased $1.53 trillion, or 42.1 percent, in the second quarter. Real disposable personal income increased 44.9 percent.

Personal spending fell by $1.57 trillion.  The contrast of rising income and falling spending drove up personal saving by $4.69 trillion in the second quarter. The personal saving rate—personal saving as a percentage of after tax personal income—was 25.7 percent in the second quarter, compared with 9.5 percent in the first quarter and 7.3 percent at the end of 2019.

Most analysts expect a sharp rebound in the current third quarter, covering the July through September period. Even still, the data is likely to show the economy contracted in 2020. So far the recovery has been less smooth than some analysts and many Trump administration officials expected. The housing sector has done well as the economy reopened but many other sectors, especially the labor market, have struggled or stalled.