US economy shrinks at unprecedented 33% rate
The United States economy shrank at a dizzying 32.9 per cent annual rate in the April-June quarter — by far the worst quarterly plunge ever — when the viral outbreak shut down businesses, throwing tens of millions out of work and sending unemployment surging to 14.7 per cent, the government said Thursday.
The US Commerce Department’s estimate of the second-quarter decline in the gross domestic product, or GDP, the total output of goods and services, marked the sharpest such drop on record dating to 1947. The previous worst quarterly contraction, a 10 per cent drop, occurred in 1958 during the Eisenhower administration.
Last quarter’s drop followed a 5.0 per cent fall in the January-March quarter, during which the economy officially entered a recession triggered by the virus, ending an 11-year economic expansion, the longest on record in the United States.
The contraction in the spring was driven by a deep pullback in consumer spending, which accounts for about 70 per cent of economic activity. Spending by consumers collapsed at a 34.6 per cent annual rate as travel all but froze and shutdown orders forced many restaurants, bars, entertainment venues and other retail establishments to close.
The plunge in GDP “underscores the unprecedented hit to the economy from the pandemic,” said Andrew Hunter, senior US economist at Capital Economics. “We expect it will take years for that damage to be fully recovered.”
So dizzying was the economic fall last quarter that most analysts expect the economy to produce a sharp bounceback in the current July-September period, perhaps of as much as 17 per cent or higher on an annual basis. Yet with the rate of confirmed coronavirus cases having surged in a majority of the states, more businesses being forced to pull back on reopenings, and the Republican Senate proposing to scale back government aid to the unemployed, the economy could worsen in the months ahead.
Last quarter, besides consumer spending, business investment and residential housing also posted sharp declines, with investment spending sinking 27 per cent and residential housing tumbling 38.7 per cent.
State and local government spending, bruised by a loss of tax revenue that forced lay-offs, also fell at an annual rate of 5.6 per cent. But overall government spending was up 2.7 per cent, powered by a 17.4 per cent surge in federal spending, reflecting the US$2-trillion-plus in relief aid that Congress enacted to provide US$1,200 payments to individuals, help to small businesses, and supplemental unemployment benefits.
The job market, the most important pillar of the economy, has been severely damaged. Tens of millions of jobs vanished in the recession. More than one million laid-off workers have applied for unemployment benefits for 19 straight weeks. So far, about one-third of the lost jobs have been recovered, but the resurgent virus will likely slow further gains in the job market.
President Donald Trump has pressured states to reopen businesses despite concerns that the virus remains a threat to workers and customers at many service industry jobs that require frequent face-to-face contact.
Many economists note that the economy can’t fully recover until the coronavirus is defeated — a point stressed Wednesday at a news conference by US Federal Reserve Chair Jerome Powell. The Fed chairman warned that the viral epidemic has been endangering a modest economic recovery and that as a result, the Fed plans to keep interest rates pinned near zero well into the future.
More than 1.4 million laid-off Americans applied for unemployment benefits last week, the US Labor Department reported on Thursday.
Before the coronavirus hit hard in March, the number of Americans seeking unemployment cheques had never exceeded 700,000 in any one week, even during the Great Recession.
All told, 17 million people are collecting traditional jobless benefits, a sign that unemployment cheques are keeping many American families afloat financially at a time of big job losses and agonising economic uncertainty.