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Although activity resumed from May, the momentum slowed down amid a resurgence of new cases of the disease, particularly in the densely populated regions of the South and West where authorities in hard-hit areas are closing businesses again or suspending reopening. This dampened hopes of a strong rebound in third quarter growth.
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Federal Reserve Chairman Jerome Powell acknowledged the slowdown in activity on Wednesday. The US central bank has kept interest rates close to zero and has pledged to keep pumping money into the economy.
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“The bottom line fell from the economy in the second quarter,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “The outlook is not very good. Americans are not behaving well in terms of social distancing, the infection rate is unacceptable and that means economic growth cannot gain ground.
Gross domestic product likely collapsed at an annualized rate of 34.1% in the last quarter, according to a Reuters survey of economists. It would be the biggest drop in production since the government began keeping records in 1947.
The decline in GDP would be more than three times the previous historic drop of 10 percent in the second quarter of 1958. On a non-annualized basis, GDP likely fell by 10.6 percent. The economy contracted 5% in the first quarter.
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“The forecast implies that the level of real GDP has actually declined by around 11 percent in the first two quarters of 2020,” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City. “If so, it would wipe out more than five years of growth and bring real GDP back to its levels last seen in mid-2014, at least as currently reported.”
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With the second quarter GDP report, the government will release data revisions going back five years. The economy entered recession in February.
Falling GDP and slowing recovery could put pressure on the White House and Congress to agree on a second stimulus package. U.S. President Donald Trump, whose opinion poll numbers plummeted as he struggled to deal with the pandemic, economic crisis and protests against racial injustice three months before the Nov. 3 election, said Wednesday that ‘he was in no hurry.
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Sea of red
Economists say that without the historic nearly $ 3 trillion budget package, the economic contraction would have been deeper. The program offered businesses wage assistance and gave millions of unemployed Americans a weekly supplement of $ 600, which expired on Saturday. Many businesses have exhausted their loans.
A Labor Department report on Thursday is expected to show new claims for unemployment benefits rose to 1.45 million in the week ending July 25 from 1.416 million in the previous period, according to a Reuters survey .
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If the GDP estimate met expectations, output would be down 11.5 percent from its pre-recession high to its lowest during the recession, underscoring the extent of the economic crisis. The economy contracted 4% peak-to-valley during the Great Recession.
“It’s on par with the recession experienced at the end of WWII, but it happened over three years, not two quarters, as it happens today,” said James Knightley, economist international chief at ING in New York. “Financial markets have forecast a strong recovery. I’m afraid there are more obstacles to come. “
Consumer spending, which accounts for more than two-thirds of the US economy, is expected to have contracted by the same margin as GDP in the second quarter. Major retailers, including JC Penney and Neiman Marcus, have filed for bankruptcy.
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A similar rate of decline is expected for business investment. Boeing Co on Wednesday announced a larger-than-expected quarterly loss and cut production from its widebody programs. The pandemic has also crushed oil prices, leading to deep cuts in shale oil production and layoffs.
The housing market has probably not been spared. Despite the record budget package, a historic decline is expected in public spending, driven by states and local governments, whose budgets have been decimated in the fight against the coronavirus.
“The big fiscal stimulus manifests itself mainly in the form of transfer payments intended to facilitate spending by consumers and businesses, rather than government spending,” said Alexander Lin, US economist at Bank of America Securities in New York.
Global trade disruptions weighed on exports and imports. While a smaller import bill is positive for GDP, it has reduced inventories, leading to lower business inventories and possibly a slowdown in production.
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