The Pandemic's Initial Impact on the Economy Becomes Clearer
August 3, 2020
By Krista Eberly, CFP®
Securities Analyst II
Another month in the books for 2020! Despite the challenges we face, July was another positive month for the stock market as it continued to rebound from the March lows.
Last week was busy with market moving news. We saw an influx of corporate earnings reports that generally came in better than expected. The Federal Reserve Open Market Committee (FOMC) met and announced no policy changes, but reaffirmed its intention to keep interest rates low for the foreseeable future. Finally, we were told the official magnitude of the U.S. economic downturn.
So with all that news, what measures the change in economic activity? Gross Domestic Product — or GDP for short. It is a gauge of the overall health of the U.S. economy. The data is released quarterly, but calculated on an annualized basis. There are three releases of the report each quarter, as it is subject to large revisions given the amount of information that goes into calculating one number.
How much did the U.S. economy contract in the 2nd quarter?
As expected, the second quarter was ugly. The initial release of GDP showed that the U.S. economy contracted at a 32.9% annualized pace. The chart below, from the Wall Street Journal Daily Shot®, shows how the second quarter ranks among the worst quarters over the last century. Most of these negative quarters, with the exception of the current one, occurred between the 1920s and 1940s. We haven’t seen a contraction of this magnitude in decades! This truly quantifies the impact of coronavirus on the U.S. economy.
Putting the number into perspective:
Keep in mind that this is an annualized figure, which takes the great performance of 2019 into account. If we just look at change in GDP from the first quarter, the decline is “only” 9.5%.
The next chart, compliments of the Wall Street Journal Daily Shot® as well, shows the various components of GDP and their impact on U.S. economic growth:
Prior to this year, consumer spending was the biggest contributor to growth. With the pandemic causing millions of layoffs and job loss, consumers reigned in their spending in the first half of the year. However, most of the contraction in the second quarter came in the month of April; while some recovery to spending patterns took place in May and June. One positive for second-quarter growth was "government spending," as the federal government stepped in to deliver fiscal stimulus to individuals and businesses.
What can we expect moving forward?
Economists currently forecast a nice recovery in growth in the third quarter. We are not out of the woods yet but the recovery is well underway and this is evidenced in the May and June economic data. Where the coronavirus goes from here will determine if the U.S. economy continues to move forward and what the ultimate shape of the recovery is.
If you haven’t scheduled a mid-year review yet, please contact an advisor today! You will be pleasantly surprised with June numbers and even more so with July’s.