• Real GDP fell by an historic 9.6% in the second quarter (32.9% annualized), led by declines in spending on services as the economy locked down in March and April.
  • The fall was deep but short. Spending rebounded in both May and June. Consumer spending rose 5.2% in June, with all major categories seeing improvement.
  • Income supports go a long way in explaining the resurgence in consumer spending. The expiry of extended UI benefits at the end of July puts this at risk and represents a clear and present danger to the economic recovery



Historical Decline in GDP As Virus Struck in Q2

Financial News- Unprecedented Economic DeclineIt was an historic week in economic data as the Bureau of Economic Analysis confirmed the largest pullback in economic activity in the history of the quarterly series (data going back to 1947). Real GDP fell by 9.5% in the second quarter (or, as it often reported, 32.9% annualized).

This was a unique economic decline. Falling consumer spending on services made up nearly 70% of the drop in GDP in the quarter. Typically in recessions, services spending is relatively unscathed. Amazingly perhaps in a health crisis, spending on healthcare made up nearly a third of the overall decline in GDP. The pullback reflects the exceptional circumstances brought on by the virus and the sudden lockdown of the economy in the final weeks of March, including non-essential medical procedures. The pace of decline was fastest in April, the first month of the second quarter. Spending rebounded in May and June as the economy re-opened.

Indeed, June income and spending data, also released this week, showed consumer spending growing by 5.2% in the month (non-annualized), with all categories seeing gains. Spending increases were led by goods categories, especially durables, which rose 8.8%. As of June, goods spending was nearly 5% higher than its pre-crisis level, with durable goods spending 9.5% above its February level. Services spending, however, still has a way to go, down close to 12% from its pre-pandemic level.

The strength of the spending rebound is attributable to the income supports provided by the federal government. As a result of one-time support checks and expanded unemployment insurance, real disposable personal income (DPI) grew by 9.6% in the quarter (non-annualized), despite the fall in GDP. Importantly however, income showed the opposite pattern of spending, with strong growth in April when one-time support checks went out, followed by declines in May and June.

This speaks to the importance of fiscal supports in maintaining the economic recovery. Negotiations in Washington on the next wave of support are ongoing but stalled this week. This as extended unemployment benefits expired on July 31st. As a result of the expiry, income will fall further in August for the close to 30 million people currently receiving this life line. Without additional supports, spending will retrace the improvement seen in May and June and set the recovery back.

In fact, warning signals that the economic recovery is tapering off in July continued to build in other indicators this week. Weekly jobless claims rose in the week ending July 25 for a second straight week. There is an important caveat to this data – it is seasonally adjusted to reflect typical July patterns, which may be less accurate in the current environment. Unadjusted, claims fell in the week. However, even here, the improvement appears to have stalled at a level still consistent with a deep economic contraction. The rise in COVID cases and slowdown in economic progress has not gone unnoticed. Consumer confidence pulled back in July, falling six points to 92.6, moving it further away from its peak of 132.6 in February.

James Marple, Senior Economist | 416-982-2557

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