- Real GDP contracted a record-breaking 32.9% annualized in the second quarter. In non-annualized terms, the American economy shrank by 9.5% in the quarter, and the level of GDP is now 10.8% below its 2019Q4 level.
- The fall in activity was led by a 34.6% (annualized) decline in real personal consumption expenditures, mainly in services, which pulled back by 43.5%. Goods consumption fell by 11.3%, with durables down 1.4% and non-durables declining 15.9%.
- Non-residential fixed investment fell 27%, with double-digit declines in all the major categories (structures down 34.9%, equipment down 37.7%) except intellectual property products, which fell just 7.2%
- International trade similarly fell off a cliff, with exports down 64.1% and imports down 53.4%. Due to the larger size of imports, net-exports contributed positively (albeit insignificantly) to economic growth (adding 0.7 percentage points).
- The only major component of GDP to grow in the second quarter was government spending, which increased 2.7%, due entirely to increased federal government spending (+17.9%), offsetting a 5.6% decline in state and local expenditures.
- Inventory investment, which is usually a major swing factor for GDP was a relatively small player in the second quarter, subtracting four percentage points from headline growth (compared to -28.2 pp from domestic demand).
- Benchmark revisions took a backseat to the second quarter GDP estimate and were relatively minor. The level of GDP was revised up 0.2% in the first quarter compared to the previous release.
Key Implications
- This was a report unlike any other and hopefully singular in its entry in the history books. The composition of the decline in activity is also unique, coming mainly from the services side of the economy, which typically avoids declining in recessions.
- The switch was essentially turned off on a huge swath of economic activity in March and June. As it was turned back on, the rate of growth was similarly unprecedented. This momentum will carry into the third quarter and lead to double-digit (annualized) economic growth. However, the tapering off of growth in July as COVID-19 cases have risen will mean that there will be a significant hole remaining to be filled.
- Ultimately, as the Federal Reserve made explicit yesterday, the economic outlook will depend on the course of the virus. Until a vaccine is found, certain economic activity will remain restricted. Maintaining the financial health of businesses and households through this period will require ongoing policy supports and a pullback of these supports remains a considerable downside risk to the recovery.
