WASHINGTON ( BLOOMBERG, REUTERS) – The US economy contracted at its steepest pace since the Great Depression in the second quarter as the Covid-19 pandemic shattered consumer and business spending, and a nascent recovery is under threat from a resurgence in new cases of coronavirus.
Gross domestic product (GDP) collapsed at a 32.9 per cent annualized rate last quarter, the deepest decline in output since the government started keeping records in 1947, the Commerce Department said on Thursday (July 30).
That’s the steepest annualized decline in quarterly records dating back to 1947 and compares with analyst estimates for a 34.5 per cent contraction. Personal spending, which makes up about two-thirds of GDP, slumped an annualized 34.6 per cent, also the most on record. The economy contracted at a 5 per cent pace in the first quarter.
US stocks plunged after markets opened after the report, with the Dow Jones Industrial Average down 510 points or 1.9 per cent at 10:06am in New York.
The collapse in GDP and faltering recovery put pressure on the White House and Congress to agree on a second stimulus package.
“This is hard to swallow,” said Jason Reed, finance professor at the University of Notre Dame’s Mendoza College of Business. “Right now, the American economy is speeding toward a fiscal cliff. Not only do we need Americans to take serious action preventing the spread of the disease, but we also need Congress to agree on another stimulus package and quickly.”
The figures lay bare the extent of the economic devastation that resulted from the government-ordered shutdowns and stay-at-home orders designed to slow the spread of the novel coronavirus that abruptly brought a halt to the longest-running expansion. While employment, spending and production have improved since reopenings picked up in May and massive federal stimulus reached Americans, a recent surge in infections has tempered the pace of the recovery.
That surge, the result of America’s failure to contain the virus, indicates that the US economy is likely to recover more slowly than places that have done a better job, such as the euro area. And the longer the pandemic lasts without a vaccine, the longer economic output will remain below pre-crisis levels, leaving permanent scars on many businesses and workers.
A separate report on Thursday showed the number of Americans filing for unemployment benefits increased for a second straight week. Initial claims through regular state programs rose to 1.43 million in the week ended July 25, up 12,000 from the prior week, the Labor Department said. There were 17 million Americans filing for ongoing benefits through those programs in the period ended July 18, up 867,000 from the prior week.
While the economic restart has helped put 7.5 million Americans back to work in May and June combined, payrolls are down more than 14.5 million from their pre-pandemic peak. The swift deterioration in the economy and job market explain why the Federal Reserve is keeping its benchmark rate pinned near zero and why it rolled out several emergency lending programs geared toward fostering liquid trading conditions in financial markets.
“We have seen some signs in recent weeks that the increase in virus cases, and the renewed measures to control it, are starting to weigh on economic activity,” Fed chairman Jerome Powell said at a news conference on Wednesday after the US central bank’s two-day policy meeting. “On balance, it looks like the data are pointing to a slowing in the pace of the recovery,” though it was too soon to say how large – or sustained – this period would be, he said.
With the election only three months away, American voters will have to decide whether to re-elect President Trump to a second term against a backdrop of the virus-induced recession and his response to the health crisis.
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