US economy sinks in Q2 amid pandemic, jobless claims rise

The US economy collapsed in the midst of the coronavirus pandemic, suffering the largest decline on record, while hopes for a recovery took another hit as job losses increased, according to government data released on Thursday.

The 32.9 per cent GDP contraction, though slightly less bad than expected, was the worst on record for the world’s largest economy dating back to 1947.

The  economy contracted at its steepest pace since the Great Depression 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 new cases of coronavirus.

The bulk of the historic plunge in gross domestic product reported by the Commerce Department on Thursday 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 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 he was in no hurry.

Gross domestic product collapsed at a 32.9% annualised rate last quarter, 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% in the second quarter of 1958. The economy contracted at a 5.0% pace in the first quarter. It fell into recession in February.

Economists polled by Reuters had forecast GDP plunging at a 34.1% 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 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 Chair 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.

Wall Street fell on Thursday following a historic contraction in second-quarter GDP and a tweet by President Donald Trump floating the possibility of delaying the US November presidential elections.

Trump, without evidence, repeated his claims of mail-in voter fraud and raised the question of a delay, despite the election date being enshrined in the US Constitution.

All S&P sectors were in the red on Thursday, led by declines in economically sensitive sectors - financials, energy and materials.

At 10:00 am, the Dow Jones Industrial Average was down 527.37 points, or 1.99%, at 26,012.20, the S&P 500 was down 51.63 points, or 1.58%, at 3,206.81. The Nasdaq Composite was down 115.47 points, or 1.10%, at 10,427.48.

Qualcomm, United Parcel Service Inc, and Procter & Gamble Co rose following quarterly results, with Johnson & Johnson up slightly as it started human safety trials for its COVID-19 vaccine. Economists say without the historic fiscal package of nearly $3 trillion, the economic contraction would have been deeper. The package offered companies help paying wages and gave millions of unemployed Americans a weekly $600 supplement, which expires on Saturday. Many companies have exhausted their loans.

This, together with the sky-rocketing coronavirus infections is keeping layoffs elevated. In a separate report on Thursday, the labour Department said initial claims for unemployment benefits increased 12,000 to a seasonally adjusted 1.434 million in the week ending July 25. A staggering 30.2 million Americans were receiving unemployment checks in the week ending July 11.

Consumer spending, which accounts for more than two-third of the US economy, plunged at a record 34.6% rate last quarter. That followed a 6.9% pace of decline in the January-March period. Major retailers including JC Penney and Neiman Marcus have filed for bankruptcy.

Business investment tumbled at a historic 27% rate. It was pulled down by spending on equipment, which collapsed at a 37.7% rate. Investment is equipment has now contracted for five straight quarters. Boeing reported a bigger-than-expected quarterly loss on Wednesday and slashed production on its widebody programs.

The pandemic has also crushed oil prices, leading to deep cuts in shale oil production and layoffs. Spending on nonresidential structures such as mining exploration, shafts and wells plunged at a record 34.9% rate in the second quarter.

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

Agencies