KEY DATA: GDP: -32.9%; Consumption: -34.6%; Investment: -49%; Disposable Income: +44.9%; Consumer Prices: -1.9%/ Claims: +12,000; Continuing Claims: +867,000
IN A NUTSHELL: “The record-setting economic decline was pretty much as expected but the more disconcerting news was the deterioration in the labor market.”
WHAT IT MEANS: Yes, the economy crashed and burned in the spring at a pace never before seen, or at least measured. We (economists) knew it was coming and we warned it was coming, but the numbers were still breathtakingly bad. Households stopped buyingas few people bought any services. My local deli owner said her food business was fine but she owns a dry cleaner and no one was bringing in any clothes. Not a surprise there. Meanwhile, businesses put their investment plans on hold and spending on equipment and structures collapsed. In addition, they stripped out all of their inventoriesas it made no sense to keep the warehouses filled if no one was buying. On the trade front, our overseas sales plummeted but we bought even less from the rest of the world,so the trade deficit actually narrowed a touch. About the only positive was government, at least the federal government. Spending on nondefense goods and services surged (as did the deficit). On the other hand, state and local governments felt the pain of the shutdowns and cut back their spending sharply. Prices fell solidly as well. If there was a clear indication of the importance of the unemployment payments, it could be seen in the disposable personal income number: It rose at a nearly 45% annualized pace. The only reason we didn’t have much larger decline in GDP was that we went from a capitalist economy to a social welfare economy with gusto.
Looking forward, weekly unemployment claims rose for the second consecutive week. Two is not a trend, but with the virus running rampant across much of the nation and the reopening of the economy largely on pause, we are likely to see that increase continue. Over the past four weeks, roughly 5.5 million people were forced to file for unemployment insurance and that four-week moving average should to keep rising. That raises questions about job growth in July.
IMPLICATIONS/COMMENTARY: There were a number of key issues that were highlighted in today’s reports. For the economy, it was not just the second quarter debacle but when you add in the decline in the first quarter, total GDP 10.6% below where it was at the end of 2019. I took a lot of grief in April when I argued that it could take two years to get back to where we were, but I am even more comfortable with that forecast now. As Fed Chair Powell noted yesterday, the virus will determine the course of the economy. A large portion of the public as well as many politicians simply refuse to deal head-on with the virus.Thus, we reopened too soon in many places and people refuse to make the sacrifices needed to keep the virus at bay. But the business community is at fault as well. The mouths that roar whenever they see a threat to their businesses have been silent about the threat the virus creates. There have been few calls by the business community or their organizations to take the necessary actions to control the virus. And that is hurting, not helping, the recovery and their companies.The second issue is future course of the economy and the next bailout bill. There are a variety of programs that support unemployed workers and when you add them all together, over thirty million people are receiving unemployment support. Forget the unemployment rate, look at how money is being earned – it is by handouts. The only way you have personal income rising in a collapsing economy is if you turn to a massive welfare economy. That was absolutely necessary and if it didn’t happened, the decline might have been fifty percent or more. This is the question Congress and the president must ask: How well is the economy capable of standing on its own? With the virus largely halting the reopening, it is likely job growth will falter and the unemployment rate will rise. With the government additional unemployment payment support now gone, income will be falling until a new bill is passed. Yes, we have the largest welfare economy in U.S. history, but it was implemented to pay for current spending and keep us from a total collapse. If you cut that support and the problem facing the economy, the virus, remains out of control, well that V-shaped recovery could disappear.Congress and the president have to face the music and start dealing with the virus. Otherwise, this welfare economy will be with us for a lot longer than anyone wants to see and the long-term negative impacts will be massive.