WASHINGTON: Throwing tens of millions out of work and sending unemployment surging to 14.7%, the government said on Thursday that the U.S. economy shrank at a dizzying 32.9% annual rate in the April-June quarter – by far the worst quarterly plunge ever – when the viral outbreak shut down businesses.
The sharpest drop was marked on records dating to 1947 after the Commerce Department\’s estimate of the second-quarter deterioration in the gross domestic product, the total output of goods and services. A 10% drop which was the previous worst quarterly contraction, occurred in 1958 amid the Eisenhower administration.
A 5% fall in the January-March quarter was followed by last quarter\’s drop, during which the economy officially entered a recession prompted by the virus which ended an 11-year economic expansion, the longest on record in the United States.
A deep pullback in consumer spending drives the contraction in the spring, which accounts for about 70% of economic activity. As travel all but froze and closure orders forced many restaurants, bars, entertainment venues and other retail establishments to close, spending by consumers buckled at an annual rate of 34.6%.
Andrew Hunter, senior U.S. economist at Capital Economics, said that the plunge in GDP \”underscores the unprecedented hit to the economy from the pandemic.\” He also stated, \”We expect it will take years for that damage to be fully recovered.\”
The economic fall last quarter was so dizzying that most analysts expect the economy to produce a sharp bounce-back in the current July-September period, perhaps of as much as 17% or higher on an annual basis. Yet with the rate of confirmed coronavirus cases having surged in a majority of states, more businesses being forced to pull back on re-openings and the Republican Senate proposing to scale back government aid to the unemployed. This could worsen the economy in the months ahead.
With investment spending sinking 27% and residential housing tumbling 38.7%, business investment and residential housing also posted sharp declines besides consumer spending, last quarter.
State and local government spending, also fell at an annual rate of 5.6%, damaged by a loss of tax revenue that compulsory layoffs. Nonetheless, overall government spending was up 2.7%, powered by a 17.4% surge in federal expenditure, reflecting the $2 trillion-plus in relief aid that Congress enacted to provide $1,200 payments to individuals, help to small businesses and additional unemployment benefits.
The job market has been severely damaged which is the most important pillar of the economy. Tens of millions of jobs have disappeared in the recession. For 19 straight weeks, more than 1 million laid-off people have applied for unemployment benefits. About one-third of the lost jobs have been recovered so far, but the growing virus will likely slow further improvements in the job market.
Despite concerns that the virus remains a threat to workers and customers at many service industry jobs that require frequent face-to-face contact, President Donald Trump has pressured states to reopen businesses.
A point stressed Wednesday at a news conference by Federal Reserve Chair Jerome Powell was that, many economists note that the economy can\’t fully recover until the pandemic is overcome. As a result of the Fed chairman warning that the viral epidemic has been jeopardising a modest economic recovery, the Fed plans to keep interest rates pinned near zero well into the future.