WASHINGTON — The U.S. economy shrank by 9.5% April through June, a historic contraction and stinging reminder of how much was lost in such a short period of time.
The drop in Gross Domestic Product was the fastest the quarterly rate has fallen in modern record keeping. As the ground beneath the economy buckled, tens of millions of jobs were erased, businesses were gutted and the future of the economy became further intertwined with an uncontrolled public health crisis.
With that pain still fresh for millions of Americans, economists say the second quarter stands as an urgent warning for what’s at stake if the vestiges of the recovery from earlier this summer vanish. While Congress clashes over another stimulus bill, and the virus forces more states to shut down bars and restaurants again, there’s mounting fear that the economy could be held back even and make a true recovery far more fraught.
The second quarter report on gross domestic product covers some of the economy’s worst weeks in living memory, when commercial activity ground to a halt, millions of Americans lost their jobs and the nation went into lockdown. Yet economists say the data should also serve as a cautionary tale for what is at stake if the recovery slips away, especially as rising coronavirus cases in some states have forced businesses to close once again.
On Thursday, the government also reported that jobless claims increased once again last week to 1.4 million, another sign any recovery is stalling out.
GDP shrank at an annual rate of 32.9%, according to the Bureau of Economic Analysis, the agency that publishes the statistics on quarterly economic activity. While it usually stresses the annualized rate, that figure is less useful this quarter because the economy is unlikely to experience another collapse like it did in the second quarter.
Still, while a tailspin at the second quarter rate is unlikely, the nascent recovery that began appearing earlier this summer appears to be in jeopardy.
On Wednesday, Federal Reserve Chairman Jerome Powell warned that the most recent surge in infections has begun to weigh on the economy, while re-emphasizing a recovery cannot be sustained unless the virus is under control.
“We’re still digging out of a hole, a really deep hole,” said Ben Herzon, executive director of IHS Markit. “The second quarter figure will just tell us the size of the hole we’re digging out of, and it’s a big one.”
Thursday’s report helps explain which parts of the economy suffered as people stayed home, cut back their spending and suddenly overhauled their routines. With retail stores shuttered and people swapping out their work wardrobes for leisurewear, clothing and footwear sales dropped. The pandemic also triggered a collapse in oil prices, exacerbated by lower gasoline sales and dampened transportation services, as Americans stayed home and avoided commutes or basic errands.
Health care fell off as the pandemic pushed people to cancel non-emergency visits and procedures, triggering layoffs within the health care industry. Restaurant closures fueled a drop in food services.
But even as the economy contracted at an unprecedented pace, some industries were at an advantage. Auto sales rose, along with recreational goods and vehicles and farm inventories.
The auto industry took a blow as businesses and the public sector had little need to buy cars, said Michelle Krebs, senior director of automotive relations for Cox Automotive and executive analyst for Autotrader. Plus, inventories are at historic lows since the public health crisis forced factories around the world to close or scale back production. But Krebs said that car buyers have proven “surprisingly resilient,” and that there are signs that people are purchasing cars to avoid public transit and safely get around.
“There’s been surprising strength in consumers actually going to the dealership, or having the dealership come to them,” Krebs said.
Housing and utilities services went up. In another example of the recession’s uneven impacts, wealthier Americans are seizing cheap mortgage rates and buying larger homes. Renters, meanwhile, are increasingly worried about evictions and falling behind on their payments.
Plus, real disposable personal income rose nearly 10%. That’s largely due to direct stimulus checks and enhanced unemployment benefits under the CARES Act — programs that were originally intended to provide short-term relief and carry millions of Americans through to the recovery. Now, Congress is divided over another round of stimulus, including over whether to extend enhanced unemployment benefits, which otherwise expire Friday, July 31.
This was the worst quarter since at least 1875, according to a historical data set created by economists Nathan Balke and Robert Gordon. The runners-up are the third quarter of 1893, when a legendary panic and run on the banks caused a crippling depression, and the fourth quarter of 1937, when the Great Depression returned with a vengeance. Those quarters saw declines of 8.4% and 7.2%, respectively.
Until now, no quarter in the modern era of GDP measurement, which began in 1947, had seen a decline of even 3%. The worst was 2.6% in 1958, amid a depression that coincided with a devastating pandemic known as the “Asian flu.”
In California, Arizona, Texas, Florida and Michigan, intensifying outbreaks have forced authorities to dial back their reopening plans and restrict business activity once again.
Jobless claims rose for the second week in a row, adding to worries about how vulnerable much of the workforce remains as enhanced unemployment benefits are due to expire.
Markets felt the shock of Thursday’s GDP figures. By early afternoon, the Dow Jones Industrial Average had recovered some of its losses from earlier in the day, dropping 220 points, or 0.8%.
A key factor in the economic recovery may be what lawmakers do.
The GDP figures show how severely the economy suffered and could “jolt Congress into action” heading into August, said Wendy Edelberg, director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution.
“One thing that policymakers, and all of us readers of this report, can take from it is that this is the outcome we want to avoid,” Edelberg said. “We want to avoid having to go through such a dramatic shutdown again, because this is the pain that it causes.”
For all the talk of a V, W or U-shaped recovery, Sung Won Sohn, professor of finance and economics at Loyola Marymount University and president of SS Economics, said a “Y-shaped,” or “sideways” expansion is in progress.
“The pandemic has created winners (top portion of Y sideways) and losers (bottom portion of Y sideways) widening the economic cleavage in the economy,” Sohn wrote in an analyst note Thursday morning.
The economy collapsed in April on the heels of a nationwide shutdown. That month, the unemployment rate spiked to the highest level since the Great Depression. April retail sales plunged 16.4%, the largest drop on record.
In May, big-name companies started filing for bankruptcy, including retailer J.C. Penney and rental car company Hertz. At the same time, states began easing restrictions on gatherings and businesses, igniting new hopes for a surprising turnaround. The May unemployment rate dropped as the labor market picked back up and retail sales popped 17.7%. President Donald Trump and other White House officials said the nation was on track for a V-shaped recovery, even as the Federal Reserve emphasized that controlling the virus was key to a sustained turnaround.
The economy added a record number of jobs in June, as the workforce recovered about one out of three jobs lost during the crisis. But measurements for June’s report were taken when the wave of coronavirus cases was at a low ebb in the United States — 35 states set new infection records in July alone.
There are new signs the economic recovery is faltering, and Powell, the nation’s top economist, has noted that rising coronavirus cases are beginning to weigh on the economy. On Wednesday, Powell said some measures of consumer spending, based on debit card and credit card use, have moved down in the past month. Hotel occupancy rates have flattened out, he said, and Americans are not going to restaurants, gas stations and beauty salons as much as they had been earlier in the summer.
“On balance, it looks like the data are pointing to a slowing in the pace of the recovery,” Powell said during a news conference Wednesday. “I want to stress it’s too early to say both how large that is and how sustained it will be.”
Kelly Lightfoot, 50, has run Happy Kids Maui, a child-care business, for more than two decades. In good times, she goes “100 miles an hour” managing the office staff and between 50 and 80 nannies who watch the children of vacationing tourists on three islands.
But in March, Hawaii’s governor locked the state down and adopted a strict quarantine that all but stopped the flow of visitors from the mainland.
Business came to a screeching halt, she said: “It was our spring break. We had big, giant bookings for March, April, May — I had to refund all that money.”
A recent Yelp analysis found Hawaii has been hit harder by coronavirus-related business closures than any other state. Lightfoot said she has slashed her spending during the lockdown. All the paychecks and expenses she would have put into the islands’ economy between March and September have gone for good. But she is still paying two office staffers, because she is determined to reopen and cannot afford to lose skilled workers.
“We’ve been around for too long to just throw in the towel,” Lightfoot said. “I started from pretty much nothing. I’m sure I can do the same thing again.”
For two decades, Richard Merle, 66, has moved works of art between galleries, museums, studios and tony residences in and around New York City. His company Lateral Move was stable and he hoped to sell it to fund his retirement. But now it’s essentially worthless.
Merle and some of the best employees in his specialized crew were in high-risk groups, so they stopped work as soon as the state locked down in March, at the tail end of the art world’s busy season.
During the lonely weeks of lockdown, he wavered between determination (“I’ve worked too hard for this business; I can’t close it”) and acceptance (“There’s a pandemic in the city. We can’t just keep running around. And we don’t know what the future holds.”) Meanwhile, the pandemic dragged on with no end in sight.
“In May, I decided there was no point in reopening,” said Merle, who has sold his box truck, tools and other assets. “I just didn’t see a future for the business. I saw going back into debt and scrounging for the next couple years.”
The Commerce Department’s GDP data go through multiple revisions, even in normal times. Now the pandemic is only amplifying the uncertainty in the process. Constance Hunter, chief economist at KPMG, said later revisions will help clarify what happened with imports and exports, for example.
With so many questions hanging over the economy, rapid data on restaurant closures, foot traffic, even visits to doctors will help fill in the spotty picture of what is happening across the nation, Hunter said.
She said it is more helpful to think about economic activity during the pandemic in what she is dubbing “FOGO,” or a “fear of going out.” That gauge will be key to understanding when people feel comfortable easing back into their pre-pandemic routines. “And (COVID-19) is going to drive the bus on that,” she said.