Historic GDP Report Underscores Depth of the Recession
- Gross domestic product, adjusted for inflation, fell 32.9 percent annualized in Q2 2020, according to the preliminary estimate from the Bureau of Economic Analysis, the largest decline in the post-WWII era. Real consumer spending (PCE) decreased 34.6 percent with spending on services falling by the largest amount since the series began in 1947. Business fixed investment fell by 27.0 percent annualized, the largest decline since Q3 1952. Residential fixed investment fell 38.7 percent annualized, the largest decline in 40 years.
- Durable goods orders rose 7.3 percent in June, according to the Census Bureau, driven by a 20 percent increase in orders for transportation equipment. Excluding transportation, durable goods orders rose 3.3 percent. New orders for motor vehicles jumped 85.7 percent, the largest increase in series history, though they remain 11 percent below the level seen in February. New orders of core capital goods (nondefense excluding aircraft) rose by the largest amount in almost two years.
- Personal income, adjusted for inflation, fell 1.5 percent in June, according to the Bureau of Economic Analysis. The second straight month of decline was driven by a further sharp pullback in government transfer payments, which fell 9.0 percent, following the 17.6 percent decline seen in May. Real personal consumption expenditures rose 5.2 percent as the economy slowly reopened, and the saving rate fell from 24.2 percent to 19.0 percent. From a year ago, the PCE price index rose 0.8 percent, an acceleration of three-tenths from May, while the core PCE price index rose 0.9 percent, a deceleration of one-tenth from last month .
- The Conference Board Consumer Confidence Index fell 5.7 points in July to 92.6, a partial reversal of the increase seen in June. Consumers’ confidence in the present situation increased, but consumer expectations fell sharply to the lowest level since March. The University of Michigan Consumer Sentiment Index fell 5.6 points to 72.5 in the final July reading, seven tenths lower than the preliminary report. Both the current economic conditions and the consumer expectations indices fell, with the latter tying the six-year low seen in May.
- The National Association of REALTORS® (NAR) Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, increased 16.6 percent in June, driven by a sharp increase in sales in the Northeast.
The preliminary report for Q2 GDP showed the worst quarter of decline in the post-WWII era, in line with our expectations, and highlighting the extent of the nationwide shutdown and its effects on the overall economy. As states loosened restrictions and businesses reopened in late May and June, there was a partial rebound in economic activity, as indicated, for example, by the strength in new orders of durable goods. While personal income fell, this was due to a further decline in government transfer benefits as the one-time stimulus payments ended, and the Paycheck Protection Program helped mitigate people needing to claim unemployment insurance. The savings rate remained elevated in June, potentially suggesting that consumers retain some firepower for spending in the third quarter even as fiscal stimulus wanes. However, the decline of two measures of consumer sentiment poses risk to our robust Q3 outlook. While we believe another national shutdown is unlikely, the recent rise in regional coronavirus cases has led to the return of restrictions and shutdowns in certain metro areas. Coupled with a likely delay in the extension of unemployment benefits, these factors could lead to a reduction in spending and further erosion in consumer confidence in the coming months. Potential declines in confidence also have implications for the housing market; though for the most part housing has remained resilient in the face of the pandemic. Strength in June pending sales will likely lead us to increase our expectations for existing sales in Q3, but we believe economic uncertainty and a lack of affordable supply will likely limit a sharp rebound in sales in the coming months.
Economic and Strategic Research Group
July 31, 2020
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