A Truly **Gross** Domestic Product
Second quarter GDP literally plummeted into the depths of the deepest oceans. Down by an unprecedented 32.9% for the quarter, last quarter’s GDP marked a new record. To put this into perspective quarterly GDP never fell more than 10% in previous recessions. COVID-19 has resulted in y-axes in literally all economic charts to be recast, and it’s a real first-world problem. Consumer spending fell by 34.6% – it was most pronounced in services spending (travel, tourism, restaurants, bars, etc.) where consumption fell 43.5% while spending on goods only declined 11.3% as Americans bought more cars, groceries, and electronics to facilitate working from home. Federal spending was the only piece of GDP that increased significantly, up 17% driven by the massive levels of federal stimulus distributed during the quarter.
Moral of the story: Economists are expecting a meaningful snapback in GDP next quarter (to the tune of an 18% increase) but the rise in COVID-19 case counts around the country is putting much of that growth at risk. Even though we could see some additional relief come from another federal stimulus package, it’s just a band aid solution. Until we can get past the virus, it’s going to be a struggle to have any sort of meaningful and sustainable recovery.
Consumer spending increased for the second straight month in June, rising 5.6% after an 8.5% increase in May. Spending increased for apparel, healthcare, dining, and travel. Incomes, however, fell 1.1% in June, after decreasing 4.4% in May.
Moral of the story: The rising case counts across the south and west, however, are already taking a toll and we’d expect consumer spending and incomes to take a hit in July. Consumer confidence is already deteriorating as job losses continue to pile in – continuing claims, which is a better indication of those that are still claiming unemployment benefits week to week, increased last week for the first time since May and could be indicative of the damage coming because of the second wave of shutdowns.
Fire Fighting Fed
The Fed’s meeting this week resulted in more of the same we’ve already been thinking. The FOMC highlighted the pace of recovery looks to be hampered by the rising cases. Even though about a third of the job losses and half of lost consumer spending have come back, companies are cutting wages and starting to right-size their workforce – it’s clear the labor market has a long road to recovery ahead and that’s a problem the Fed will have to grapple with.
Moral of the story: The economy is already engulfed in flames and the only thing the Fed can really do at this point is show they’re willing to do what it takes to facilitate the recovery. For now, the FOMC unanimously voted to keep interest rates near zero and continue their pace of asset purchases.