Here Comes GDP, and It’s Going to Be Ugly

The government is set to release the first estimate of second quarter GDP and it’s going to be a doozy. Just how bad was the pandemic’s impact from April through June? Estimates are all over the place, ranging from a contraction of 15 to 35 percent on an annualized basis. [GDP is reported at a seasonally adjusted annual rate (SAAR, which means that a 35 percent Q2 decline is approximately a 10 percent decline from the seasonally adjusted Q1 reading, which came in at -5 percent.]

With the economy coming to a sudden stop, it should be no surprise that the numbers are going to be 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 percent of GDP. And that doesn’t account for the decline in business spending in those areas.”

While that damage is in the past, the current quarter is not expected to show the snapback that economists had hoped to see. The New York Fed's Weekly Economic Index (WEI), an index of ten daily and weekly indicators of real economic activity, has reversed course after climbing back from the depths of the April and May coronavirus decline. The reason is clear: the spike in Covid-19 in the South and West has led to renewed lockdowns and skittish consumers in those parts of the country.

Last week, initial claims for unemployment benefits rose for the first time since last March, with the largest increases occurring in Florida, Georgia, and California. Separately, the Census Bureau’s weekly 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):

• Households where someone had a loss in employment income since March 13: 50.1%

• Expect someone in household to have a loss in employment income in the next 4 weeks: 35.1%

• Either sometimes or often not enough to eat in the last 7 days: 10.8%

• Missed last month’s rent or mortgage payment, or have slight/no confidence that they can pay next month on time: 26.4%

With about one in five Americans receiving some form of unemployment assistance, the expiration of the federal government’s $600 weekly supplement will throw millions of households into a panic. Republican lawmakers are concerned that the $600 benefit was too generous, because many lower income recipients have been making more staying out of the workforce than they were prior to the pandemic. Democrats argue the extra money has not only helped struggling Americans, it has also been good for the economy because lower income earners have spent, not saved the extra cash.  Regardless of whether Congress lowers the amount to a more conventional replacement rate of income (70 percent) or maintains the current, more generous program, families need this lifeline and need it now.

The economy also needs the next phase of stimulus. Kathy Jones Senior Vice President, Chief Fixed Income Strategist, Schwab Center for Financial Research notes that the money will provide “a further boost to the economy,” which “should help support consumption and employment, lifting expectations for a stronger recovery.” Without adequate government support, the recovery could be slower and more painful. Deloitte sees several quarters of “subdued” growth and their question for the next five years is sobering: “Are we really going to end up where we started? The answer is probably no.”