Commentary Directory
- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- A Breather for the Eurozone as Inflation Hits Two-Year Low
- Germany's September CPI Report: A Clearer Picture of Inflation Trends
- US Manufacturing Demonstrates Resilience Amidst Volatility in August
- The ECB Prepares to Address Excess Liquidity Through the MRR
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Chinese CPI Trying to Buck the Deflation Trend
- Energy Prices Rise but the Core Disinflationary Trend is Maintained in September
- PPI's Quiet Rise and the Energy Elephant in the Room
- Small Businesses Grapple with Inflation and Financial Strain in September
- A Wacky September Jobs Report Shows Strong Labor Market
- A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
Breaking Down the Worst Quarterly GDP Decline in US History
Jacob Hess
July 30, 2020
- GDP
- Economic Indicator
The long-awaited 2020 Q2 GDPa came out today after months of deliberation on how the COVID-19 outbreak and the lockdown would initially impact the economy. Consensus estimates suggested that 2020 Q2 GDP would fall about -34% from the previous quarter in the largest drop in economic output in history. The official advance estimate came in at -32.9% just above expectations but still the worst quarterly GDP data point ever reported. Stocks saw mixed reactions as the Dow (-0.85%) and the S&P 500 (-0.38%) finished lower while the Nasdaq (0.43%) actually saw a gain. The 10-year Treasury yield dropped back to its low near 0.55% as investors continued to move away from risk.

Personal consumption, which has been a strong driver of GDP growth in the past, tanked -34.6% in the second quarter with service spending seeing the largest drop at -43.5%. Goods expenditures fared slightly better at -11.3% as the goods economy adjusted to the new COVID-19 environment relatively well. The service consumption drop ended up contributing -22.93% to the overall GDP drop with recreation services spending losses contributing -4.69% and food services and accommodations spending losses contributing -4.69%. Interestingly, health care expenditures accounted for a large -9.50% of the overall GDP drop despite the public health crisis. With consumption being the largest contributor to the GDP losses in Q1 and Q2, it's clear that it will be the most important component of a recovery in GDP from this bottom, specifically service spending. The importance of services is also why reopening processes are being pushed so hard.
It wasn't just households that stopped spending last quarter but businesses as well. Gross private domestic investment fell -49.0% in Q2 with large losses across categories. Nonresidential investment was down -29.9% with investment in physical assets, structures and equipment, tanking, and residential investment was down -38.7% (despite a housing market in short supply). Even though the drop in fixed investment was larger percentage-wise than personal consumption, it only accounted for -9.36% of the overall GDP drop. Equipment spending was the most significant subcategory of investment accounting for -2.13% of the overall drop.
Net exports actually made a positive contribution of 0.68% to GDP with the drop in imports offsetting the drop in exports. This is likely caused by the US going into a more severe lengthy lockdown due to more COVID-19 cases in the country. Similarly, China, one of the US' most important trading partners, came out of the crisis relatively quickly suggesting their demand for goods and services in the trading relationship outweighed the US'. The pandemic has also caused severe supply chain disruptions for companies doing business overseas. Firms in the US that were forced to halt production to reduce inventories likely reduced orders abroad as well.
Government consumption grew in place of losses in investment and personal expenditures but only at a 2.7% rate. The federal government grew their spending 17.4% in Q2 with a 39.7% increase in non-defense spending. State and local governments, which have been struggling financially during the crisis, saw spending drop -5.6%. Despite the uptick in government economic activity, it only contributed 0.82% to overall GDP growth. There's little that the government can do in pure consumption to disrupt the economic declines. However, state and local governments can't be allowed to go under while the unemployment system is at its current level of stress.
Despite the declines in consumption and investment, disposable personal income still increased 42.1% this quarter caused by the large increase in government social benefits. That lead to a jump in the personal savings rate from 9.5% in the first quarter to 25.7% in the second quarter since all of the new cash infused in the system was not spent. The hope is that when things start to open up, that cash infusion will intensify a recover in consumption and boost GDP. However, a prolonged lockdown can limit the effects that excess disposable income will have. Third-quarter GDP will be very significant in that it will describe how the rebound in consumption may develop.