Chief Economist Scott Brown discusses current economic conditions.
Real GDP was reported to have fallen at a 32.9% annual rate in 2Q20. Nobody should have been surprised by that. Component data had already indicated massive and broad-based weakness and most economists’ estimates fell in the -30% to -35% range. News reports had generally implied that the downturn was ongoing. That’s clearly not that case, as most data reports show that economic activity bottomed out in April and growth resumed in May and June. Barring a sharp retreat in August and September, consumer spending figures point to a record pace of growth in 3Q20. Still, as Fed Chair Powell noted in his post-FOMC press conference, “Even with the improved economic news in May and June, overall activity remains well below its level before the pandemic.” The path forward depends on the virus, the efforts to contain it, and the amount of fiscal support.
GDP is a quarterly figure, but one that often depends on the months leading into it. The economy was growing nicely in January and February, but March weakness was enough to push 1Q20 GDP growth into negative territory. April was a disaster, but the March drop contributed significantly to the second quarter’s weakness. Adjusted for inflation, consumer spending fell at a 34.6% annual rate in 2Q20. The gains in May and June imply that consumer spending will rise at a record pace in 3Q20. If we were to get no monthly growth in the quarter – that is, spending remains at the June level in July, August, and September – consumer spending will have risen at a 26.8% annual rate. With COVID-19 cases rising in many states, we could see a retrenchment in spending, relative to June. However, it’s unlikely that we’ll return to a full lockdown.
Some of the May/June strength may reflect the satisfaction of pent-up demand. Consumers who were unable to spend in March and April may have bought in May and June. If that’s the case, then we may see some roll back in spending in the third quarter. Adjusting for inflation, consumer spending on motor vehicles rose 8.8% in June, up 11.7% from a year earlier. Rebounds were also strong in other consumer durables and in clothing. With consumer spending restrained by social distancing, checking and savings accounts generally grew in March and April. This may have provided a down payment on a new car, truck, boat, or Jet Ski. With most individuals still reluctant to get on a plane or go to an amusement park, families can be expected to opt for vacations a little closer to home, say a trip to the lake or shore – and wouldn’t a new car be nice?