US GDP shows largest economic contraction in 75 years, with only limited recovery in sights

Comment on Q2 GDP

US GDP shows largest economic contraction in 75 years, with only limited recovery in sights

Erik Lundh, Senior Economist, The Conference Board

US Real Gross Domestic Product contracted by 32.9% (annualized) during the second quarter of 2020, following a 5% contraction in Q1. The US economy has not seen an economic contraction of this magnitude since at least 1945, when the country demobilized following World War II. Today's initial estimate from the Bureau of Economic Analysis (BEA) means that the economy shrank nearly 10% in non-annualized terms between April and June, a period that encapsulated the worst of the COVID-19 pandemic and lockdown, and the beginning of the reopening.

According to the BEA, personal consumption expenditures growth fell to −34.6% in Q2, with the brunt of the pain hitting services (−43.5%), vs. goods (−11.3%). Meanwhile, investment contracted sharply, with non-residential investment growth dropping to −27.0% and residential investment growth to −38.7%. The hits to exports and imports largely cancelled each other out, resulting in no drag from net exports. Overall government spending rose 2.7%, with federal nondefense spending up 39.7%, helping to mitigate the pandemic’s overall damage to the economy.

Looking ahead, given the rapid spread of the virus over the summer and the impact it has had on many states, it is not clear that economic activity will significantly improve from June/July levels. We anticipate some recovery in the second half of 2020, but do not expect the economy to reach pre–COVID-19 output levels until 2021 at the earliest. The Conference Board presently has three distinct scenarios for US economic growth in 2020, ranging from a “swoosh”-shaped fall recovery scenario (yielding annual GDP growth of −6.4%) to a more daunting “W”-shaped scenario (yielding annual GDP growth of −7.2%).

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