Second Quarter GDP Reflects Early Pandemic Response

The latest GDP figures show the worst single-quarter U.S. economic contraction in over 70 years.

The U.S. economy contracted 9.5% through the second quarter, the worst single-quarter decline in gross domestic product (GDP) since the Commerce Department started tracking it in 1947. It was expected the report would show a dip, but it’s important to recognize what that dip represents. It does not indicate the economy’s current trajectory, just the most stringent period of pandemic lockdown.

“GDP is a backward-looking number, and we expect to see a sharp rebound in the third quarter despite recent upticks in COVID-19 cases slowing economic momentum,” says Chief Investment Officer Larry Adam.

Potential tailwinds for a stronger third quarter include U.S. Federal Reserve support (with a commitment to keeping interest rates low until at least 2022), leading vaccine candidates reaching the third phase of trials, and the expectation that Congress will pass a new round of fiscal stimulus. Auto sales have bounced back and consumer spending has risen, Chief Economist Scott Brown noted, but as Federal Reserve Chairman Jerome Powell said, the shape of the recovery will be dictated by the coronavirus, efforts to contain it and the degree of government support.

“The Federal Reserve will do its part, keeping short-term interest rates low and ensuring the financial system has adequate liquidity, but the economy will not fully recover until we get a vaccine or an effective treatment,” Brown says. “Ongoing fiscal support will be needed to support those hardest hit.”

On that front, congressional and White House negotiations continue. Between the Senate’s $1 trillion opening position and the House’s $3 trillion package, “We expect it will settle on a package of around $1.5 trillion to $2 trillion to support spending, employment and the pandemic response,” said Ed Mills, Washington policy analyst. The fate of unemployment insurance and the effect of adjustments on consumer spending will be closely watched. A second round of small business loans will provide critical assistance to small businesses and prevent an uptick in unemployment.

Through July, the S&P 500 and NASDAQ Composite indices saw steady gains, with NASDAQ outperforming the S&P 500 – the 10th month in a row the more tech-focused index saw greater returns.

Performance reflects price returns as of market close on July 31, 2020.

Analysts are looking at these key factors, both here and abroad.