Jill On Money: The GDP plummeted
The first estimate of second quarter GDP was a doozy. Just how bad was the pandemic’s impact from April through June? The Bureau of Economic Analysis said that the US economy contracted at a 32.9% annualized pace. [GDP is reported as a seasonally adjusted annual rate, which means that a 33% Q2 decline is approximately a 9.5% decline from the seasonally adjusted Q1 reading, which came in at -5%.] The first half of 2020 makes the ten-year “slow and low” recovery period from 2010 through 2019 seem positively idyllic. Gone are the days when we can complain that the economy was “only growing” by 2.2% to 2.5%.
With the economy coming to a sudden stop, it should be no surprise that the numbers were ugly. According to Daniel Bachman from consultancy Deloitte, “The decline in consumer spending is driving the downturn…just two key categories of consumer spending—food services and accommodations and recreation services—together account for 8% of GDP. And that doesn’t account for the decline in business spending in those areas.”
The current climate has also accelerated the pace of retail bankruptcies.
Ascena Retail Group, the owner of Ann Taylor, LOFT, Lane Bryant, and others, now joins Neiman Marcus, JC Penney, Brooks Brothers, J.Crew, Pier 1, Modell’s, and Lucky Brands in the bankruptcy club, with new members likely to arrive throughout the year. This year could see more bankruptcies than 2010 (48), according to S&P Global Market Intelligence.
Perhaps the good news about the rotten GDP reading is that it reflects the past. As more states eased restrictions, spending increased in May and June. But the very openings that helped boost economic activity also allowed COVID-19 to spread throughout the South and West, prompting the re-imposition of masking, social distancing, and other restrictions, which has meant a slow down in activity in July.
The Census Bureau’s Household Pulse Survey showed the number of employed Americans declined by about 6.7 million from mid-June through mid-July. While the survey is new and may not fully capture the whole picture, some of the other findings are notable (all categories represent percentage of adults):
o Households where someone had a loss in employment income since March 13: 50.1%.
o Expect someone in household to have a loss in employment income in the next 4 weeks: 35.1%.
o Either sometimes or often not enough to eat in the last 7 days: 10.8%.
o Missed last month’s rent or mortgage payment, or have slight/no confidence that they can pay next month on time: 26.4%
Analysts from Capital Economics note, strength in the second half of the year relies squarely on “how the virus plays out, and health policy responses to it” and of course, the next phase of stimulus will play an important humanitarian and economic role.
Kathy Jones Senior Vice President, Chief Fixed Income Strategist, Schwab Center for Financial Research underscores that the new stimulus money will provide “a further boost to economy,” which “should help support consumption and employment, lifting expectations for a stronger recovery.” However, without adequate government support, the recovery could be slower and more painful. To be clear: There will be growth in the second half of 2020, but few economists believe that it will be strong enough to bring GDP to pre-pandemic levels.
Deloitte sees several quarters of “subdued” growth and the question and answer they provide about the next five years is sobering: “Are we really going to end up where we started?...The answer is probably no.”
Conversely, Capital Economics thinks “some of the pessimism about the longer term economic impact of the virus may be overdone…For all these reasons, good public health policy is good economic policy.”
(Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at firstname.lastname@example.org. Check her website at www.jillonmoney.com)© 2020 TRIBUNE CONTENT AGENCY, LLC