The full scope of the pandemic’s toll on the U.S. economy was on display Thursday, when government officials reported that gross domestic product shrank the most on record in the second quarter and 17 million Americans claimed state unemployment benefits in mid-July.
While the GDP drop -- an astounding 32.9 per cent when annualized -- was widely anticipated at this point, the jobless claims figure was not. The almost 900,000 increase in the number of people claiming continued benefits provides the latest evidence that the nascent recovery from the collapse is being undermined by the resurgence of the virus across much of the U.S.
That’s particularly visible in rising continued claims from California, the most populous state, that may reflect renewed shutdowns and job losses. These figures indicate that even though third-quarter GDP could very well show a sharp initial rebound and give the appearance of a strong recovery, the gains could be short-lived.
And the outlook may get even worse. Crucial lifelines in the pandemic, like the extra US$600 in weekly unemployment benefits, are expiring, and lawmakers have made little progress on agreeing to another stimulus package. Support from Congress has buoyed the economy in recent months, and further action will be critical in determining the path of the recovery.
“You’ve got this triple whammy coming through,” said James Knightley, chief international economist at ING Financial Markets. “One is the fear factor from COVID-19 on the rise and how that changes people’s behavior. Secondly, you’ve got unemployment rising because states are reversing course on their reopenings. And then, third, you’ve got the income squeeze” with expiring benefits.
What Bloomberg’s Economists Say
“Fragile spending patterns paired with a looming income cliff mean extending augmented unemployment benefits will be critical. Reduction in line with the US$200 per week proposed by Senate Republicans would scorch green shoots of recovery.”
-- Yelena Shulyatyeva, Andrew Husby and Eliza Winger
All of this is bad news for U.S. President Donald Trump, who was already trailing his rival, Democrat Joe Biden, in polls ahead of the Nov. 3 election. Minutes after the GDP report was released, Trump suggested in a tweet that the vote be delayed until the pandemic eases and people can “safely vote” in person rather than by mail.
While Trump doesn’t have the authority to make such a decision -- only Congress does and its leaders immediately rejected the idea -- the tweet in part underscores the angst of a president who saw a decade-long economic expansion end abruptly under his watch.
U.S. stocks sank after Thursday’s economic data, though it’s still up more than 40 per cent from its pandemic low in March. The yield on 10-year Treasuries fell to 0.55 per cent, close to a record low.
In addition to the continuing-claims figures, initial filings for benefits rose slightly last week to 1.43 million, the second straight increase and still more than double the worst week during the last recession. Seasonal adjustments are making the numbers trickier to interpret, however -- unadjusted initial claims actually fell for a second week to the lowest of the pandemic.
Even so, the claims figures join other high-frequency data on mobility and shifts worked, the kinds of numbers that have caught the concern of Federal Reserve Chairman Jerome Powell and his colleagues, who reiterated Wednesday they will keep interest rates near zero for the foreseeable future.
“It looks like we’re seeing a slowdown in the rate of growth,” Powell said Wednesday in a virtual press conference following the latest Fed policy meeting. “And that might be short-lived. It might not be.”
The GDP report, for its part, will likely be a permanent indication of the pandemic’s economic low point. It showed personal spending, which makes up about two-thirds of GDP, slumped the most on record. Business investment in structures, equipment and intellectual property saw the steepest slide since 1952, while residential investment dropped the most since 1980.
It could have been even worse without the congressional stimulus, which helped federal spending rise at a 17.4 per cent rate, the fastest since 1967.
The jobless-claims data come with some caveats, such as seasonal adjustments. That, along with states’ processing challenges and other issues, have added volatility to week-to-week swings.
“I’ve actually become very skeptical of the claims numbers,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “I think that there are a lot of issues with the data in terms of reporting, replication, fraud and all the rest,” and the numbers haven’t been a good predictor of the monthly employment report, he said.
Like Powell, many economists are flagging increasing signs that the recovery is slowing, with stubbornly high unemployment likely to weigh on consumer spending in the second half.
“The outlook is very cloudy at this point,” said Jay Bryson, chief economist at Wells Fargo & Co. “If the labor market really stalls here, that’s going to have some significant implications obviously for real personal consumption later this year, particularly if you couple in the fact that people’s unemployment benefits” will likely decline.