US Expected To See Worst Economic Contraction Since Great Depression

 

- Data set to confirm worst US recession in a generation 

- Widespread company closures and job losses halted Q2 activity  

- CARES Act reduced virus impact and set up Q3 rebound  

- Resurgence of Covid-19 deaths could stall recovery 

- Report due at 08.30EST/12.30GMT on Thursday 

 

 

By Harry Daniels 

Editor-in-Chief, LiveSquawk News 

@ HarryDaniels71 

 

29 July 2020  

 

The worst of the Covid-19 pandemic’s economic hit on the US economy fell in April at the start of the second quarter, according to survey data and regional reports, after which the country slowly re-emerged from lockdown with mixed results.  

 

On Thursday, the first look at US second-quarter GDP growth is expected to show a 34.4pct contraction as economists predict America experienced its worst economic slump since the Great Depression. The US economy had already entered recession in February (First-quarter GDP -5pct), several weeks ahead of the World Health Organisation (WHO) declaration of a Covid-19 global pandemic. 

 

In a note, Veronica Clark and Andrew Hollencrost of Citi Research said, “Data released so far confirm a substantial contraction in second-quarter real GDP. However, after bottoming in late April reopening led to a pickup in production and hiring in May and June, consistent with the robust rebound we had been forecasting.” 

Job Gains Have Helped Soften The Blow For Now

At the end of June there were approximately 19.5mln people on continuing claims jobless benefits, with some 728,120 initial claims entered under the Pandemic Unemployment Assistance program.  

 

Yet non-farm payroll numbers have shown surprising resilience despite claimant data. May and June saw roughly 7.5mln total jobs added, which lowered the unemployment rate to 11.1pct from 14.7pct in April. 

 

Matthew Luzzetti, chief US economist at Deutsche Bank, said, “While most forecasters likely anticipate the pace of labour improvement to slow somewhat from the heady progress in May and June, a more-severe slowing or even a reversal of recent labour gains could materially impact second-half growth estimates, which will likely be fine-tuned this week following the advance second-quarter real GDP report.” 

 

Monetary and Fiscal Stimulus To Continue

The US government and the Federal Reserve have tried to combat the negative economic effects of the virus. Congress has already passed stimulus measures in excess of USD3trln, and legislators are currently discussing another fiscal injection. This week, Senate Republicans formally announced a stimulus plan that is around USD1trln less than the USD3trln proposed by the Democrats.   

 

To date, the CARES Act has softened the blow for many Americans faced with crippling job losses. Analysts predict that the USD600 a week “federal boost” meant that a high proportion of recipients have higher incomes than when they were in full-time employment.  

 

Markets Already Looking To Q3
Source: BNP Paribas

Over the past couple of months, the US has experienced a resurgence in Covid-19 cases across southern and western states such as Texas, Florida, and California. Subsequently, some of these regional authorities have since reintroduced controls and curfews or shelved reopening plans. Investors fear this could hit the expected third-quarter economic rebound. 

 

In many ways, second-quarter data has already been discounted by investors. A day before the Bureau of Economic Analysis releases its GDP report, the Federal Reserve’s rate-setting committee will release its latest assessment of economic activity. It is scheduled to update official forecasts in September.  

 

Deutsche Bank’s Luzzetti said, “In summary, this week's FOMC meeting will set the tone going into a highly anticipated September gathering when the Fed is expected to unveil the results of its policy review and potentially reset the policy accommodation dial. For monetary policymakers, the debate in Congress over the next couple of weeks will be a key factor in their outlook and subsequent calibration of monetary policy going forward.”