Battered US economy posts its steepest contraction on record

WASHINGTON • The US economy contracted at its steepest pace on record in the second quarter as the Covid-19 pandemic shattered consumer and business spending, and a nascent recovery is under threat from a resurgence in coronavirus cases.

Gross domestic product (GDP) shrank 9.5 per cent in the second quarter from the first, a drop that equals an annualised pace of 32.9 per cent, the deepest decline in output since the government started keeping records in 1947. The drop in GDP was more than triple the previous all-time decline of 10 per cent in the second quarter of 1958.

The bulk of the historic plunge in GDP reported by the Commerce Department yesterday occurred in April, when activity almost ground to an abrupt halt after restaurants, bars and factories, among others, were shuttered in mid-March to slow the spread of the coronavirus.

The collapse in GDP and faltering recovery 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 that he was in no hurry. "This is hard to swallow," said finance professor Jason Reed of the University of Notre Dame's Mendoza College of Business.

"Right now, the American economy is speeding toward a fiscal cliff. Not only do we need Americans to take serious action preventing the spread of the disease, but we also need Congress to agree on another stimulus package, and quickly."

The economy contracted at a 5 per cent pace in the first quarter. It fell into recession in February.

Economists polled by Reuters had forecast GDP plunging at a 34.1 per cent rate in the April-June quarter.

The Commerce Department's Bureau of Economic Analysis, which compiles the GDP report, attributed the tumble in output to measures taken in March and April in response to Covid-19, saying they "led to rapid shifts in activity".

Though activity picked up starting in May, momentum has slowed amid a resurgence in new cases of the respiratory illness, especially in the densely populated South and West regions, where the authorities in hard-hit areas are closing businesses again or pausing reopenings. That has tempered hopes of a sharp rebound in growth in the third quarter.

Federal Reserve chairman Jerome Powell on Wednesday acknowledged the slowdown in activity.

The US central bank kept interest rates near zero and pledged to continue pumping money into the economy. Stocks on Wall Street opened lower. The dollar was steady against a basket of currencies. US Treasury prices rose.

Economists say that without the historic fiscal package of nearly US$3 trillion (S$4.13 trillion), the economic contraction would have been deeper.

Crucial lifelines in the pandemic, like the extra US$600 in weekly unemployment benefits, are expiring at a time when the economic recovery is showing signs of teetering.

Lawmakers are currently debating another stimulus package to support businesses and the unemployed, but the timing of the Bill is unclear.

Support from Congress has buoyed the economy in recent months, and further action will be crucial in determining the path of the recovery.

In a separate report yesterday, the Labour Department said initial claims for unemployment benefits increased 12,000 to a seasonally adjusted 1.43 million in the week that ended last Saturday. A staggering 30.2 million Americans were receiving unemployment cheques in the week that ended on July 11.

Consumer spending, which accounts for more than two-thirds of the US economy, plunged at a record 34.6 per cent rate last quarter.

That followed a 6.9 per cent pace of decline in the January-March period.

Business investment tumbled at a historic 27 per cent rate. It was pulled down by spending on equipment, which collapsed at a 37.7 per cent rate.

Investment in equipment has now contracted for five straight quarters.

The housing market was not spared, with spending on homebuilding tumbling at 38.7 per cent rate.

But government spending rose at a 2.7 per cent rate, thanks to the historic stimulus package.

Though a smaller import bill helped to narrow the trade deficit and was positive for GDP, it cut inventories, leading to a drawdown of stocks by businesses that subtracted 3.98 percentage points from GDP.

REUTERS, BLOOMBERG