Thursday, July 30, 2020 12:09 a.m. EDT
by Thomson Reuters
By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. economy probably contracted in its steepest speed since the Great Depression from the next quarter since the COVID-19 pandemic ruined consumer and business spending, potentially wiping out over five decades of expansion.
The majority of the historic dip in gross domestic product expected to be reported from the Commerce Department on Thursday happened in April when action nearly ground to an abrupt stop later restaurants, pubs and factories amongst others were shuttered in mid-March to impede the spread of coronavirus.
Though action picked up beginning in May, momentum has slowed amid a resurgence in fresh cases of this disease, particularly in the densely populated South and West areas where governments in hard-hit regions are shutting businesses again or tripping reopenings. That’s tempered hopes of a sharp rebound from growth in the next quarter.
Federal Reserve Chair Jerome Powell on Wednesday acknowledged the downturn in action. The U.S. central bank retained interest rates near zero and vowed to keep on pumping cash into the market.
“The bottom fell out of the market in the next quarter,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “The prognosis isn’t too great. Americans aren’t acting nicely concerning social distancing, the disease rate is unacceptably high which means economic growth can’t gain any traction.”
Gross domestic product likely collapsed in a 34.1% annualized rate , according to a Reuters poll of economists. That are the strangest drop in output because the government began keeping records in 1947.
The fall in GDP are more than triple the prior all-time decrease of 10% in the next quarter of 1958. On a non-annualized foundation, GDP likely tumbled 10.6%. The market contracted 5% in the first quarter.
“The prediction implies that the degree of real GDP actually dropped by approximately 11% in the first two quarters of 2020,” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City. “If so, that would wipe out more than five years growth, and pull real GDP back to its levels last seen at the middle of 2014, at least as currently reported.”
With the second-quarter GDP report, the government will publish revisions to data going back five years. The economy slipped into recession in February.
The plunge in GDP and faltering recovery could put pressure on the White House and Congress to agree on a second stimulus package. President Donald Trump, whose opinion poll numbers have tanked as he struggles to manage the pandemic, economic crisis and protests over racial injustice three months before the Nov. 3 election, said on Wednesday he was in no hurry.
SEA OF RED
Economists say without the historic fiscal package of nearly $3 trillion, the economic contraction could have been deeper. The package offered companies help paying wages and gave millions of unemployed Americans a weekly $600 supplement, which expires on Saturday. Many companies have exhausted their loans.
This, together with the sky-rocketing coronavirus infections is keeping layoffs elevated.
A report from the Labor Department on Thursday is expected to show new claims for unemployment benefits increased to 1.45 million in the week ending July 25 from 1.416 million in the prior period, according to a Reuters survey.
Should the GDP estimate meet expectations, output would be down 11.5% from its peak before the recession to the lowest point during the downturn, underscoring the magnitude of the economic crisis. The economy contracted 4% peak to trough during the Great Recession.
“This is on a par with the downturn experienced as World War Two concluded, but that occurred over three years, not two quarters, as is happening today,” said James Knightley, chief international economist at ING in New York. “Financial markets have priced in a vigorous recovery. I fear there could be more stumbling blocks to come.”
Consumer spending, which accounts for over two-third of the U.S. economy, is expected to have contracted at the same margin as GDP in the second quarter. Major retailers, including JC Penney and Neiman Marcus, have filed for bankruptcy.
A similar pace of decline is anticipated in business investment. Boeing Co on Wednesday reported a bigger-than-expected quarterly loss and slashed production on its own widebody programs. The pandemic has also crushed oil prices, leading to deep cuts in shale oil production and layoffs.
The housing market was also likely not spared. Despite the record fiscal package, a historic drop is expected in authorities spending, driven by state and local governments, whose budgets have been decimated in the fight against coronavirus.
“The significant fiscal stimulus primarily shows up because transfer payments to facilitate consumer and business spend, rather than government spending,” said Alexander Lin, a U. ) S. economist at Bank of America Securities at New York.
Disruptions to global trade depressed exports and imports. Though that a smaller import bill is positive for GDP, it cut inventories, resulting in a drawdown of stocks by companies and probably dragging output.
(Reporting from Lucia Mutikani; Tracking by Jonathan Oatis)