By Thomas Cooley and Peter Rupert
The BEA announced that Q2 real GDP declined 32.9%, pretty much as expected, but still hard to fathom. In fact, due to the government shutdown, these numbers are very difficult to interpret. To what extent has the new surge in COVID-19 cases, prompting more shutdowns in some areas, raised uncertainty of the future path of GDP for Q3 and Q4? It is certainly not out of the realm of possibility to see a 30% increase for Q3! These massive gyrations have made it even more problematic to gauge the underlying health of the economy.
To be clear the 32.9% number is quarter on quarter growth annualized. The quarter on quarter growth is -9.5%. Whichever you prefer, this is the largest drop ever recorded!
The Great Recession seems to have had an impact on the trend rate of growth of real GDP and the current pandemic has moved us even farther from the historical long run trend.
Our view is that the government shutdowns, CARES/PPP and the change in the due date for taxes have made the data impossible to put in historical context. For example, the graph below shows the percent change in real GDP along with the percent change in real disposable income. In general the two move more or less together. The recent shutdowns combined with the recent transfer payments have thrown a monkey wrench into the behavior of these series. While real GDP fell 32.9% real disposable income increased 44.9%. Of course the disposable income numbers also reflect the fact that tax deadlines were moved from April 15 to July 15.
Monthly disposable income and personal consumption expenditures was released by the BEA today (July 31) again showing large zig-zag patterns. Real disposable income in June decreased 1.8% following a 5.2% decline in May, while real personal consumption expenditures increased 5.2% in June following an 8.4% increase in May.
The quarterly declines were seen in virtually every component. Personal consumption expenditures down 34.6%, real investment fell nearly 50% with fixed investment down 30%, exports down 64.1% and imports down 53.4%. Non-defense government spending was up 39.7%.
Initial claims were also announced today and, like in our recent post on initial claims, the seasonally adjusted claims increased while the not seasonally adjusted decreased as they did last month.
The stock market appears to have shrugged off the early signs of illness and has been climbing, with the Nasdaq setting records almost daily.
Equity markets seem to be pricing in a V shaped recovery. We have argued for a short V-shaped response followed by a long slow slog back to potential. A lot of this depends on the consumer and how they respond as the bills come due, how employment recovers, and how the government resolves its current impasse over unemployment benefits and further stimulus.
The Federal Reserve is doing all it can think of to do and it remains to be seen how effective is the accommodation they have made so far. This drama has many episodes and we are only a few months in.
