EconoFACTS

July 30, 2020 | 09:10

U.S. Real GDP (2020 Q2 Advance) — Knockdown

Economist

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

As expected, the lockdowns and anxiety caused by the coronavirus led to the largest quarterly economic contraction in at least seven decades. Real GDP cratered 32.9% annualized in the second quarter following a 5.0% dive in the first quarter. This was somewhat better than the consensus call (around -34%) and beat our estimate of -40%. Consumer spending dove 34.6%, led by a 81.2% tumble in food services and accommodations. Clothing and gasoline sales also plunged. But durable goods held up better, slipping just 1.4% due to a 5.5% increase in autos/parts and a 40.5% surge in recreational goods and vehicles. Those $1,200 CARES Act cheques came in handy (and could support Q3 spending if Congress signs off on another round). Non-residential business investment sank 27.0%, less than expected, amid a lighter pullback in intellectual property products such as software. But a massive $316 billion drawdown in business inventories hived off 4 ppts from GDP growth. Residential construction careened 38.7% lower in the quarter, despite a sharp snapback in home sales at quarter end. Exports plunged 64.1% and imports dove 53.4%, though trade added 0.7 ppts to GDP growth. A 17.4% spike in federal government spending also added 1.2 ppts to growth, though this was partly offset by a 5.6% decline at the state and local levels.

Historical revisions trimmed the 2019 GDP growth rate a tenth to 2.2%, but actually lifted growth in the second half of last year. This, coupled with the less-disastrous Q2 print, could suggest some upside potential to our 2020 GDP call of -5.5%, though we will likely scale back the expected rebound in Q3. The partial rollback of reopening plans in some states has slowed the recovery in July, after some indicators (notably home sales and manufacturing surveys) sported V-shaped rebounds in May/June.

The slowdown in July is reflected in today's jobless claims report. After three months of declines, initial claims rose for a second straight week in seasonally-adjusted terms, though by a less than expected 12,000 to 1.434 million in the week of July 25 (they fell 171,000 to 1.206 million in NSA terms). Continuing claims rose more than expected, by 867,000 to 17.018 million in the previous week that covers the July payrolls survey (also rose by 536,000 to 16.881 million in NSA terms). The insured jobless rate popped to 11.6% from 11.1%, though it is still down from 13.2% in the June survey period. The data flag a weaker increase in nonfarm payrolls in July and just a moderate decline in the unemployment rate from the current 11.1%.

Bottom Line: After the worst quarter on record, the economy is still wrestling with the misery and uncertainty caused by the coronavirus. While the recovery is underway, it will take a long time before the economy recovers.

Table 1 - United States — Real GDP

(quarter/quarter % change : s.a.a.r.)

Source: BMO Economics, Haver Analytics