GDP GROWTH

The coronavirus pandemic caused the nation’s economic output to fall at its fastest pace on record with gross domestic product declining 9.5% in the second quarter.  On an annualized basis, the GDP – the broad measurement of goods and services produced – fell at a rate of 32.9%.  The Commerce Department’s initial estimate showed that personal spending, which accounts for roughly two-thirds of GDP, fell an annualized 34.6%, also the most on record.

The drop in spending on services was measured at 43.5% with travel, tourism, restaurant spending, and medical care being hit the hardest, subtracting nearly 23 percentage points from the GDP.  Sales of household goods also declined but the cutbacks were not as severe as purchases fell 11.3%.  Although sales of clothing, gasoline, and many other goods fell sharply in the second quarter, consumers bought more autos, groceries, and household staples as many Americans shifted to working from home.

Overall business investment in facilities, equipment, and intellectual property fell to a 27% annualized pace, the steepest decline since 1952.  Infrastructure outlays dropped 35%, led by cuts in the energy sector. Equipment spending was down 37.7%.  The level of inventories shank by a $235.6 billion annual rate compared to an $80 billion drop in the first quarter. READ MORE>

EMPLOYMENT

After suffering a swift and withering downturn from the onset of the coronavirus pandemic that emerged in late March, the nation’s labor market started a partial rebound late in the second quarter. But the recovery was sidelined by a surge in Covid-19 infections that began in June and heightened employer uncertainty.

After skyrocketing from 3.8% in February to a 14.7% high in April the nation’s unemployment rate fell to 11.1% in June with 4.8 million more workers collecting paychecks than in May.  Nevertheless, there still were nearly 15 million fewer jobs in June than in February. The Department of Labor’s Bureau of Labor Statistics also said a misclassification error could have undercounted the jobless rate when 88.6% of job losses were classified in April and May as “temporary.” Additonally, persistent data-collection problems may have reduced the unemployment rate by 1%, the Labor Department said.

But because of the spiking Covid cases at the end of the second quarter, the tenuous economic recovery is in jeopardy of stalling. With infections hitting record numbers in most states, particularly in California, Florida, Texas and Arizona, governors were pulling back from their reopening plans. Teachers unions and a majority of parents are opposing resumption of in-class instruction unless more is done to provide a safe environment in schools. This, in turn, threatens to delay a recovery. READ MORE>

MONETARY POLICY

Inside the Federal Reserve the outlook was split at the close of the second quarter about how the economy is likely to perform as the nation struggles against the persistent coronavirus pandemic. Either way, however, there is a consensus that continued fiscal support is imperative.

There were no signs that the central bank will change course on its commitment in March to do all it deems necessary to prevent a liquidity shortage, including buying Treasury bonds and mortgage-related securities as required to maintain well-functioning financial markets.

There is wide agreement that the second quarter’s improvement in hiring and consumer spending was due chiefly to the rapid and sizable fiscal support that came in the form of government relief checks and extra unemployment insurance payments that are set to expire in the coming weeks.

Because of this fiscal support there is a view that the economy will adjust to the pandemic leading to a solid recovery later this year along with a decline in the jobless rate, which is being voiced by James Bullard, president of the Federal Reserve Bank of St. Louis.  “The macroeconomic news for May and June, reported with a lag, seems to suggest that April will prove to be the lowest point of the crisis,” Bullard said at a July meeting of the Economic Club of New York. READ MORE>

GLOBAL ECONOMY

Global growth is forecast to fall to minus 4.9% this year – 1.9 percentage points less than April’s outlook by the International Monetary Fund.  The IMF blamed a worse economic impact of the Covid-19 pandemic than originally anticipated.  Additionally, the IMF’s latest World Economic Outlook projects a slower recovery than previously forecast, showing global growth in 2021 at 5.4%. The IMF cautioned there was a “higher-than-usual degree of uncertainty” around its latest forecast but said the acute, adverse impact on low-income households imperils the progress in reducing extreme poverty in the world since the 1990s.

More than two-thirds of governments around the world have scaled up their fiscal support since April to mitigate the economic fallout from the pandemic and the stringent lockdowns as growth is revised further down relative to the April 2020 World Economic Outlook. Announced fiscal measures are now estimated at near $11 trillion globally, up from $8 trillion estimated in the April 2020.  Nevertheless, of the approximately 2 billion workers worldwide, the International Labor Organization estimates nearly 80% have been adversely affected. READ MORE>