GDP Plummets in Faltering Economy

Although it was not totally unexpected, seeing the actual number is still quite a shock: the nation’s Gross Domestic Product plunged by 32.9% in the second quarter —  the biggest drop in history, and it follows a 5% drop in the first quarter. This performance is more characteristic of a depression than a recession.

It was not unexpected, considering that the U.S. economy was virtually closed in April and parts of May, with no measurable output during that time.

The chart above displays quarterly GDP since the second quarter of 2010, showing that economic output has fallen to the level GDP of five years ago, in 2015.

All major components of GDP except for government spending fell in the second quarter. The foreign sector suffered the largest declines. U.S. exports fell by nearly two-thirds from their first-quarter level (64%), while U.S. imports were down 53% for the quarter. This is a direct result of the on-and-off economic shutdown around the world, among most of our trading partners.

Investment overall has dropped by 49% from its level in the first quarter. Typically, investment is defined as the sum of three components: non-residential (i.e. business) investment; residential investment, and change in business inventories. All three are down for the quarter, but the latter, business inventories, was the biggest cause of the drop in total investment. This is pointedly illustrated by Americans’ recent experience with empty supermarket shelves and stores running short of supplies.

In fact, with imports down sharply and production just recovering, consumers may experience still more product shortages, longer time to get product delivered, as well as higher prices.

Despite some indications of positive activity in a few sectors of the economy (such as housing) this foreshadows a very spotty recovery and is not an overall rosy outlook.

Consumer Spending Dives

Many retail businesses were forced to close due to the pandemic shutdown, and travel/hospitality and entertainment activities were also severely restricted. On top of this, millions of consumers lost their jobs and income, obviously curtaining their ability to spend, even though unemployment benefits were available to many. Thus, total spending by consumers in the second quarter fell by 34.6% (rounded to 35% in the chart above).

Spending for both goods and services fell severely, the latter taking the biggest hit at a whopping 43.5% in the quarter.

Consumer services captured seven of 10 dollars spent by consumers last year, but the pandemic shutdown forced consumers to drop spending on services, and in the second quarter, this  accounted for just six of 10 consumer dollars (61%).

The dramatic 43.5% drop in  consumer spending on services is led by the realignment in air travel and hospitality. Beyond the government-imposed restrictions, those industries could face a greater reluctance by consumers who want to avoid contagion until there is more clarity on the pandemic.

But some services have been less affected by COVID-19. Leading the way is spending on Housing & Utilities, which are defined as the expense by consumers for rental housing, the house utilities for both rented and owned properties, as well as an imputed service cost for homeowners.

Another area of consumer services that has sustained less damage is the so-called FIRE sector, which stands for Finance, Insurance and Real Estate services. Spending here was down only 1% for the quarter. Other major sectors are also shown in the chart below.

Consumer spending on goods has also experienced dramatic change. The forced shutdown and “working from home” conditions have resulted in a shift in expenditures toward products that can be used at home. Consumers spend the most on food and beverages for consumption at home, which currently captures over one-quarter of the dollars consumers are spending on all types of goods. This category rose by 2% in the second quarter.

Consumer expenditures on Motor Vehicles and Parts was flat compared to first-quarter spending; this category represents 11% of consumer spending for goods. But the largest gain was in Recreational Goods, including recreational vehicles, which rose by 7%. They also accounted for 11% of the spending on goods.

Home Furnishings, which includes furniture and other durable goods, also showed resiliency in the second quarter. Spending for these items was down just 3% from the prior quarter.

Mortgage Rates Remain Stable

While mortgage rates dropped marginally last week —  by two basis points to 2.99% for a 30-year, fixed rate loan — the Fed appears to be signaling that it will not make any effort to push interest rates higher if inflation perks up.

The Fed’s official policy, in fact its mandate, is to focus on price stability (taken as low or no price inflation) and economic growth. Any sign of inflation would lead the Fed to move to raise interest rates. But this stance might change in the future if the Fed decides that its focus should be on stimulating growth by keeping rates down, where they’ve been for the last decade or so.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal indicating that the latest value is improving; “Yellow,” as it’s common understood denotes caution because the variable maybe changing direction; and “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately-owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single Family Starts.  It is the number of single family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing Home Sales. These data are issued monthly by the National Association of Realtors, and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $500,000 and over. The data are released quarterly by the U.S. Department of Commerce, and are not seasonally adjusted. Thus a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building Materials Sales. These data, released monthly by the Department of Commerce, capture the total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as Home Centers, for instance.

We hope that you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further details.