MNI DATA REACT: Economic Standstill Drives Record US GDP Drop

U.S. GDP tanked in the second quarter of the year, plummeting at a record annualized rate of 32.9% as the economy shutdown for much of the three months to slow the spread of Covid-19, the Bureau of Economic Analysis said Thursday.

The historic drop was primarily driven by a sharp decline in personal consumption expenditures, which fell by 34.6%, the most on record. Large declines in services spending were led by health care spending, which fell by 9.5%, while a drop-off in goods spending was led by cuts to purchases of clothing and footwear, the BEA said.

Shutdowns prompted "rapid shifts in activity" as establishments either closed completely or moved to remote work and consumers and businesses "canceled, restricted, or redirected their spending," the BEA said. Though stay-at-home orders issued in March were partially reversed in some parts of the country beginning in late April, momentum from reopenings wasn't nearly enough to offset a virtual standstill in economic activity.

TRADE VOLUMES HALVED

Exports dropped by 64.1% in the second quarter, driven by a sharp decline in exports of capital goods, according to the BEA. Imports contracted by 53.4% following a 15.0% decline in Q1.

Nonresidential fixed investment, a proxy for business spending, fell by 27% in Q2, also the largest percent decrease on record, according to the St. Louis Fed. That was led by a decline in investments of equipment, particularly transportation equipment. The BEA said a 38.7% decline in residential fixed investment was a reflection of declining purchases of single-family housing as shutdowns coincided with the spring selling season. The residential housing market has rebounded strongly since.

Spending by state and local government spending also showed considerable weakness in Q2, falling by -5.6%, though that decline was partially offset by government spending at the federal level, which rose 17.4%, primarily on nondefense spending (+39.7%).

BROAD DEFLATION

The GDP price index fell 1.5% in Q2 after rising 1.4% in Q1. The PCE price index declined by 1.9% following a 1.3% gain in the first quarter. Excluding food and energy, PCE fell 1.1% in Q2.

Federal Reserve Chair Jay Powell on Wednesday said the pandemic-driven shock to demand will dominate over coming months. "Fundamentally, this is a disinflationary shock," he said. "We see a big shock to demand. We see core inflation dropping to 1%. I do think for quite some time we're going to be struggling against disinflationry pressures."