US economy shrank at record-breaking 33% rate during second quarter

The US economy shrank at a dizzying 32.9% annual rate in the second quarter – by far the worst quarterly plunge ever.

The coronavirus outbreak has shut down businesses, throwing tens of millions of people out of work and sending unemployment surging to 14.7%, the US government said.

The Commerce Department’s estimate of the second-quarter decline in the gross domestic product, the total output of goods and services, marked the sharpest such drop on records dating to 1947. The previous worst quarterly contraction, a 10% drop, occurred in 1958 during the Eisenhower administration.

Last quarter’s drop followed a 5% 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% of economic activity. Spending by consumers collapsed at a 34.6% 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 bounce-back in the current July-September period, perhaps of as much as 17% or higher on an annual basis.

Yet with the rate of confirmed coronavirus cases having surged in a majority of states, more businesses being forced to pull back on reopenings and the Republican-controlled Senate proposing to scale back government aid to the unemployed, the economy could worsen in the months ahead.

A man walks past a retail store that is going out of business due to the coronavirus pandemic in Illinois
A man walks past a retail store that is going out of business due to the coronavirus pandemic in Illinois

Last quarter, besides consumer spending, business investment and residential housing also posted sharp declines, with investment spending sinking 27% and residential housing tumbling 38.7%.

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%. But overall government spending was up by 2.7%, powered by a 17.4% surge in federal spending, reflecting the 2 trillion dollar-plus in relief aid that Congress enacted to provide 1,200 dollar 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 1 million laid-off people 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 is likely to slow further gains in the job market.

US 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 cannot fully recover until the pandemic is defeated – a point stressed at a news conference by Federal Reserve chairman 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.