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COVID-19 Hits US Economy and Labor Market Hard, Prompts Record Slump in Q2

Matt Eidinger July 30, 2020

The US economy experienced an unprecedented decline in output during the second quarter as a result of the coronavirus’s crippling effect on businesses across the nation. The US dollar is modestly lower on release of the figures, which were expected to be severely negative.

According to this morning’s advance estimate from the US Bureau of Economic Analysis (BEA), US GDP contracted about 9.5% during the second quarter – an annualized rate of 32.9% and the largest quarterly decline on record.

Driving the spectacular collapse in economic output was a severe 34.6% or $1.3 trillion drop in personal consumption expenditures through the quarter. Household consumption of services was the primary driver of decreased consumer spending as mandatory shelter in place orders prompted non-essential business closures in all 50 states and severely curbed economic activity in the services sector.

Although preliminary estimates point to a bottoming out of economic activity in the second quarter and the potential for a double-digit recovery in the Q3, consumer and business uncertainty was written all over today’s GDP report. Indeed, after setting aside an additional $300 billion in savings during the first quarter, the American consumer doubled down in Q2 – stashing away an additional $3.1 trillion, or 25.7% of disposable income according to the BEA report.

However, personal income was bolstered by a large increase in government spending, which advanced 17.4% as the federal government moved quickly to get financial aid to distressed workers. Several rounds of federal government fiscal stimulus measures, such as the CARES Act, enacted in March and April, left consumers with an extra $2.4 trillion in transfer receipts, much of which was added to above-mentioned personal savings.

Additionally, private investment completely collapsed – falling a record 49% last quarter as a result of heavy decreases in nonresidential investment in structures and transportation equipment.

The US dollar advanced earlier in the morning, but gave up these gains and subsequently fell a modest 0.1% according to the trade-weighted dollar index (DXY). In contrast, the Big Dollar rose a modest 30 bps against the euro in the minutes after this morning’s release.

Separately, a sharp U-turn in many states’ reopening efforts prompted an increase of 12,000 new initial jobless claims last week – bringing the weekly total up to 1,434,000 according to the Department of Labor. Advance estimates for California, Florida, Georgia and Texas point to jobless claims still holding at record levels as the coronavirus outbreak continues in the southern sunbelt region.

Similarly, continuing jobless claims rose more than 800,000 to just over 17 million during the week ending July 18.

This morning’s double whammy for the US economy and labor market comes one day after the US Federal Reserve held its Fed Funds target range steady at 0% – 0.25% and committed to all monetary policies actions necessary to support economic recovery. In addition, the White House and Congress remain at a standstill on whether – and in what form – to extend weekly unemployment benefits. As can been seen from today’s GDP data, consumer spending remains the key driver of American economic activity – or inactivity – as the nation deals with COVID-19.

Matthew Eidinger
Market Strategist and Fintech Specialist,
Dealing Operations

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