Real GDP plummeted 32.9% at an annualized rate in the second quarter of 2020, by far the biggest drop in the history of the series, going back to 1947. The previous largest decline was 10.0% in 1958.

Final sales of domestic product, which is GDP minus the change in inventories and measures total demand for goods and services produced in the United States, fell 29.3% annualized in the second quarter.

Real GDP fell 5.0% in the first quarter (annualized), unrevised from the previous estimate. In the first half of 2020 real GDP contracted 10.6% unannualized. By comparison, during the Great Recession a decade ago real GDP fell 4.0% over six quarters, so the Viral Recession was a much more severe downturn during a much shorter period of time.

On a year-ago basis real GDP was down 9.5% in the second quarter. This was by far the biggest year-over-year contraction in the history of the series.

The coronavirus pandemic and restrictions on economic activity hit most components of the U.S. economy in the second quarter. Consumer spending fell almost 35 % annualized, subtracting 25 percentage points from annualized growth, as households cut back drastically on their purchases due to stay-at-home orders, a reluctance to venture out, and massive job losses. Business fixed investment dropped 27%, subtracting almost 4 percentage points from growth, as firms tried to weather the storm. Residential investment fell 39%, subtracting almost 2 percentage points, as homebuilding contracted with many construction sites closed.

Inventories subtracted 4 percentage points from growth in the quarter as businesses rushed to cut stocks amid weak demand and supplies from abroad were disrupted.

Trade was a slight positive in the second quarter, adding a little less than 1 percentage point to growth. Exports fell 64% annualized as the pandemic caused supply chain disruptions and demand from overseas for U.S. goods and services dropped. Imports fell 53% as U.S. consumers bought less from abroad, due to both weak demand and limited supplies.

Government spending in GDP rose 2.7% annualized in the quarter, with a 17% increase in federal spending in response to the pandemic offsetting a 6% drop for state and local spending. Overall, government added a little less than 1 percentage point to second-quarter growth.

The GDP price index fell 1.8% annualized in the second quarter as prices fell for most goods and services. This was the biggest one-quarter drop in economywide prices since 1948. The GDP price index was up 0.6% in the second quarter from one year earlier.

The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, fell 1.9% annualized in the second quarter, but was still up 1.5% from one year earlier. The core PCE price index, which excludes volatile food and energy prices, dropped 1.1 % in the second quarter and was up 1.6 % from a year earlier. Consumer prices are likely to increase in the third quarter as demand picks up.

As expected GDP contracted by the most on record in the second quarter; the only question was how bad it was going to be. The 33% annualized decline was close to most estimates of 30 to 35%. But that is backward looking — how the economy did in the second quarter. The question now is what the recovery is going to look like. Most measures of economic activity — employment, retail sales, housing starts, auto sales, etc. — have improved since April, indicating that economic growth has resumed and GDP will increase in the third quarter.

But the strength of the nascent recovery is highly uncertain. Much of it depends on the path of the virus. The pickup in coronavirus cases in many parts of the country is very concerning. Many states are reimposing restrictions on economic activity, although in a more targeted way than earlier in the crisis. But even without state mandates, continued spread of the virus is deterring consumers from spending and weighing heavily on industries such as travel and tourism, restaurants, and in-person entertainment. As long as people are reluctant to be in large groups, the recovery will be soft.

In addition, fiscal stimulus is at risk of fading. One-time stimulus payments and extended and expanded unemployment insurance benefits allowed consumers to boost their spending in the late spring as the economy started to reopen, even with job losses of 22 million in March and April. But the boost from the stimulus payments is fading, and an extra $600 per week in unemployment benefits is set to expire on July 31. If these payments do expire aggregate household income would fall by about $75 billion a month, which is likely to lead to a drop in consumer spending and weigh on the recovery.

Assuming the spread of the virus is contained and Congress passes additional fiscal stimulus, PNC’s baseline forecast calls for economic growth that is well above its long-run trend in the second half of 2020 and throughout 2021. PNC expects annualized GDP growth of around 10% in the second half of 2020. Even so, real GDP is not expected to return to its pre-recession level until the first half of 2022.

The unemployment rate will fall below 10 % later this year, and end 2021 at above 6 % and 2022 at above 5 %. Inflation will remain consistently below the Federal Reserve’s 2 % objective in the near term as excess capacity throughout the economy limits businesses’ pricing power, allowing the central bank to maintain highly expansionary monetary policy, including keeping the fed funds rate in its current near-zero range into 2024.

Initial unemployment insurance claims rise

Initial claims for unemployment insurance rose for a second straight week in the week ending July 25 to 1.434 million, up 12,000 from the previous week (1.422 million, revised higher from 1.416 million). The increases of the past two weeks followed 16 straight weeks of decline since the end of March, when initial claims peaked at an all-time high of almost 7 million. Although claims are down almost 80% from their record high, they are still far above their early 2020 level of around 200,000 per week.

Continuing claims, which measure the number of people receiving regular UI benefits, were up 867,000 in the week ending July 18, to 17.018 million. Claims for the week ending July 11 were revised slightly lower, to 16.151 million, from 16.197 million. This was the first increase in continuing claims in 8 weeks. Continuing claims peaked at almost 25 million in early May, and have slowly declined. Before the crisis in early 2020, continuing claims were about 1.7 million per week.

In addition, 830,000 people filed claims for the special Pandemic Unemployment Assistance program (PUA) in the week ending July 25, down 106,000 from the previous week (not seasonally adjusted). There were 12.4 million people receiving PUA in the week ending July 18, up from 13.2 million the previous week (again, not seasonally adjusted). Overall there were 30.2 million people receiving some form of unemployment benefits in the week ending July 18, down from 31.8 million the previous week.

The picture of the labor market from UI claims is mixed. After skyrocketing in March and April as the pandemic hit, the number of people filing for unemployment insurance benefits initially declined, but appears to have plateaued in recent weeks. Claims are volatile, and seasonal adjustment problems around the pandemic are making comparisons more difficult.

But what is apparent is that layoffs remain far above their pre-pandemic level, that tens of millions of workers have lost their jobs over the past few months and remain unemployed, and that the pace of improvement in the labor market has slowed.

One big concern is that bonus UI payments of $600 per month expires July 31 unless Congress reauthorizes them. These payments are adding about $75 billion per month to household income, at a time when income from work has plummeted. There are concerns that generous UI benefits are deterring some of the unemployed from looking for jobs. But the loss of huge amounts of UI income in the near term would be a significant drag on consumer spending. PNC’s baseline forecast assumes that Congress reauthorizes these payments over the next few weeks, although at a somewhat lower level.

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