“Worst quarter ever.” It sounds like a bit of hyperbole, but that’s an accurate description of the quarter that started in March and ended in June as COVID-19 was raging.
Figures out Thursday from the Bureau of Economic Analysis showed that the U.S. economy contracted by almost a third (32.9 percent) during the second quarter. That’s the biggest drop in the gross domestic product since the government began tracking such data in 1947.
The spectacular crash was brought on by widespread stay-at-home orders forcing businesses to close their doors and economic activity to all but grind to a halt. That reversed an 11-year expansion, the longest period of economic growth in U.S. history. It also marks the classic definition of the recession — two consecutive quarters of declining growth. (The U.S. economy shrank 5 percent in Q1.)
And when we say that the second quarter was the worst on record, it’s beaten the competition by a wide margin. In 2008’s fourth quarter — the Great Recession’s peak — the gross domestic product (GDP) only lost 8.4 percent or roughly a quarter of what it gave up this time around.
The only good piece of news is that the terrifying 32.9 percent figure is the economic contraction as presented at an annualized rate. i.e., how much the economy would shrink if conditions observed during Q2 carried on for a year. If you don’t annualize the number, GDP “only” declined by somewhat less jaw-dropping 9.5 percent between April and June.
Why are things so bad and when will they get better?
Let’s check it out:
Shutdowns Beget Mass Unemployment
The recession has seen a staggering number of Americans lose their jobs as government agencies forced businesses to shut down, which prompted many of lay off or furlough employees.
The U.S. Labor Department has officially put the nation’s unemployment rate as high as 14.7 percent since the pandemic began. Still, a deeper recent analysis shows that nearly half of the population lacked a job.
The employment-population ratio, the number of employed people as a percentage of the U.S. adult population, was 53 percent last month, meaning 47 percent of Americans were without a job, according to Bureau of Labor Statistics figures.
Unlike the Labor Department’s “official” jobless rate — which only includes people looking for work — the BLS ratio counts all adults who aren’t currently in the labor force. That captures, among other things, Americans so discouraged about finding jobs that they’ve stopped looking.
The only semi-good news is that the jobless numbers have since improved as the nation began a phased reopening. The Labor Department reported earlier this month that the official jobless rate fell back to 11.1 percent as the U.S. economy added a record 4.8 million nonfarm jobs in June.
“These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed in March and April due to the coronavirus pandemic and efforts to contain it,” the BLS said in releasing the numbers.
But unemployment figures since then look less than rock solid. Initial jobless claims out Thursday (July 30) showed a second consecutive week of rising claims after months of improvement. The numbers popped back up as new cases of COVID-19 continue to surge and push states and municipalities to reinstitute lockdowns.
Unemployment Breeds A Great Spending Slowdown
As the pandemic began robbing some consumers of their jobs, PYMNTS surveys demonstrated the outbreak was also hurting confidence among those still employed as to whether they’d have jobs for much longer.
Given that many Americans also lack enough savings to ride out an extended jobless period, many consumers have sharply curtailed their current spending. Earnings reports from Visa, Mastercard, American Express, JPMorgan Chase, Bank of America, Wells Fargo and other financial firms have all clearly demonstrated that.
And although there was some tempering of that trend when $1,200 government-stimulus checks started hitting U.S. consumers’ accounts, the data showed that unlike previous stimulus programs, this one saw consumers sticking money into savings accounts instead of spending it.
What Happens Now?
Much remains unknown about what comes next for the U.S. economy, with lawmakers arguing about a potential new round of government stimulus.
Republicans favor a $1 trillion plan to partly preserve recently increased unemployment benefits, launch another round of more-tailored Paycheck Protection Program loans and fund another $1,200 of direct payments to most U.S. adults. Democrats prefer a $3 trillion package that fully preserves expanded unemployment and includes larger direct payments to citizens.
Both sides have announced they plan to fight it out, so how much stimulus goes out to whom and when remains unclear. But in either case, economists have high hopes for a third-quarter rebound.
For example, the Federal Reserve Bank of New York forecasts GDP to grow at an annualized 13.3 percent between July and September. That would be a dramatic improvement, but not necessarily mean the crisis is over. After all, a massive number of shuttered small businesses seem likely never to reopen.
All in, that means that if Democrats and Republicans want to help the U.S. economy, they’re going to have to close the $2 trillion gap between their proposals — and fast. Because the economic damage that’s been done so far is big, and there’s not a lot of time to delay turning it around.