3 Months Of Hell: U.S. Economy Drops 32.9% In Worst GDP Report Ever

Jul 30, 2020
Originally published on July 30, 2020 4:03 pm

Updated at 9:32 a.m. ET

The coronavirus pandemic triggered the sharpest economic contraction in modern American history, the Commerce Department reported Thursday.

Gross domestic product — the broadest measure of economic activity — shrank at an annual rate of 32.9% in the second quarter as restaurants and retailers closed their doors in a desperate effort to slow the spread of the virus, which has killed more than 150,000 people in the U.S.

The economic shock in April, May and June was more than three times as sharp as the previous record — 10% in 1958 — and nearly four times the worst quarter during the Great Recession.

Loading...

"Horrific," said Nariman Behravesh, chief economist at IHS Markit. "We've never seen anything quite like it."

Another 1.43 million people filed for state unemployment last week, an increase of 12,000, the Labor Department reported Thursday. It was the second week in a row of increased unemployment filings and shows that the economic picture continues to remain grim.

GDP swings are typically reported at an annual rate — as if they were to continue for a full year — which can be misleading in a volatile period like this. The overall economy in the second quarter was 9.5% smaller than during the same period a year ago.

After a sharp drop in March and April, economic activity began to rebound in May and June, although that recovery remains halting and could be jeopardized by a new surge of infections.

"As soon as the virus started to take off again in key states like Texas, California, Arizona, Florida, it's fading very rapidly," Behravesh said.

Restaurant owner Cameron Mitchell likens the pandemic to a hurricane. What appeared to be a business rebound in June turned out to be merely the eye of the storm, and he's now being buffeted by gale-force winds again.

"Our associates are more scared to work today and guests are more afraid to go out, so sales have dropped," Mitchell said.

Cameron Mitchell operates more than 50 restaurants in 13 states. He says business was rebounding in June but has dropped again with the surge in new coronavirus infections.
Cameron Mitchell Restaurants

Business at his restaurants in Florida had nearly recovered to pre-pandemic levels in June but has since fallen sharply.

Other industries have enjoyed a more durable recovery, though few are back to where they were in February.

Dentists' offices are ordinarily one of the more stable parts of the economy, but they closed for all but emergency services during much of the spring. Dental hygienist Alexis Bailey was out of work for 10 weeks before her office in Lansing, Mich., reopened at the end of May.

At first, she was reluctant to go back to work while the virus was still circulating.

"I was terrified," Bailey said. "I was not happy to be back. But I have a job to do and I like to do it and I want to help people. We talk about how essential we are, so that's what we've had to do."

Dental hygienist Alexis Bailey was initially nervous about returning to work but says she quickly grew comfortable with the new protective measures, including a face shield (not shown).
Christina Dauka, MSDH

Within an hour of returning to work, Bailey said, she began to feel comfortable, particularly with the additional protective gear and other safety precautions her office has adopted.

"I tell my patients all the time I wouldn't be here if I didn't feel safe," she said.

Nationwide, dental offices added more than a quarter-million jobs in May and another 190,000 in June. And there has been no shortage of patients.

She thought no one would want to come. "But we're booked," Bailey said. "People miss getting their teeth cleaned. They want to catch up. Every time they come in, they say, 'This has been nice to get out of the house and feel safe and talk to somebody.' "

Factory production has also begun to rebound, along with construction. But airlines and amusement parks are still struggling.

"It's very much a sort of two-tiered economy right now," Behravesh said.

The unemployment rate approached 15% in April, and in June it was still higher — at 11.1% — than during any previous postwar recession.

While the drop in GDP was largely driven by a decline in consumer spending, the economic fallout was cushioned somewhat by an unprecedented level of federal relief.

Wages and salaries fell sharply in April, but that was more than offset by the $1,200 relief payments that the government sent to most adults and by supplemental unemployment benefits of $600 per week.

Those government payments helped prevent an even steeper drop in consumer spending — the lifeblood of the U.S. economy — and allowed struggling families to buy groceries and pay rent.

Federal Reserve Chair Jerome Powell said Wednesday that the money "has been well spent. It has kept people in their homes. It has kept businesses in business. So that's all a good thing."

Those extra unemployment benefits are expiring this week, though. With coronavirus infections still threatening the recovery, additional federal support is likely to be necessary.

"Until we get the virus under control, we're going to need more help," Behravesh said. "Our view is that we're not going to get to the pre-pandemic levels of economic activity until some time in 2022."

Restaurant owner Mitchell says his business lost $700,000 in June alone. He predicts a wave of restaurant bankruptcies unless the federal government provides more relief.

"No one is looking for a handout here," he said. "We're looking to survive."

He's watching news of vaccine trials closely in hopes that eventually diners will feel comfortable eating out again in large numbers.

"I don't think it's the next couple of weeks," he said. "But I tell our team, 'Every day that goes by, it's one day closer to the end of this thing.' "

Copyright 2020 NPR. To see more, visit https://www.npr.org.

STEVE INSKEEP, HOST:

We now have confirmation that shutting down the U.S. economy for a good part of the second quarter was very bad for business. In truth, we knew that, of course, but a number from the government makes it clear just how bad. It's an estimate of economic growth, or the lack of it, in the second quarter - April, May and June. You will recall that the country began shutting down in March and was pretty fully shut down - as close as it could be anyway - by April 1.

NPR chief economics correspondent Scott Horsley is with us. Scott, good morning.

SCOTT HORSLEY, BYLINE: Good morning, Steve.

INSKEEP: What's the number you got?

HORSLEY: It's the sharpest contraction in postwar history, Steve - 32.9%. Now, that's a little bit misleading. GDP numbers are usually reported in annual rates as if the sharp contraction we saw in the second quarter was going to continue for a full year, and we don't expect that to happen. Nevertheless, it is about four times the worst quarter that we saw during the Great Recession more than a decade ago. Chief economist Nariman Behravesh of IHS Markit calls this a horrific GDP number.

NARIMAN BEHRAVESH: We've never seen anything quite like it.

HORSLEY: Now, this was led by a sharp drop in consumer spending. As you mentioned, restaurants and retailers closed their doors in a desperate fight to slow the spread of the virus. As sharp as the downturn was, though, it was also very short. By the end of the quarter, we did begin to see a resumption of economic activity. But to be sure, that recovery is fragile and incomplete.

Just this morning, we learned that another 1.4 million people applied for state unemployment benefits last week. That number was up slightly for the second week in a row. Claims for a special federal unemployment program for folks who ordinarily are not eligible were down a bit.

INSKEEP: Well, that sets the stage for now. We're in the third quarter now, Scott - July, August, September. What do economists expect?

HORSLEY: A lot depends on what happens with the pandemic, and some businesses are more vulnerable than others. Behravesh described a kind of two-speed recovery, and you can hear that in some of the folks I've been talking with this week. Restaurant owner Cameron Mitchell - he likens this pandemic to a hurricane. He says what appeared to be a business rebound in June turned out to be only the eye of the storm, and now he's being buffeted again by gale-force winds.

CAMERON MITCHELL: The most prolonged, difficult operating environment I've ever been a leader in, and I've been in this business for 40 years.

HORSLEY: Mitchell operates restaurants in 13 states, and he points to Florida as an example. His outlets there were almost back to normal in early June, but as infections took off, business dropped again. And that's true for a lot of businesses that depend on consumer traffic.

INSKEEP: Well, which industries are doing well, then?

HORSLEY: Well, factories are picking up steam again. Construction crews are humming once more. So are dentists' offices, actually. About 450,000 people went back to work in dental offices in May and June.

INSKEEP: Yeah.

HORSLEY: In Michigan, hygienist Alexis Bailey says at first she was nervous about going back to work, but she got comfortable pretty quickly with the new safety precautions. And to her surprise, there was a lot of patients. The office has been booked solid.

ALEXIS BAILEY: People missed getting their teeth cleaned. They want to catch up. I think people - every time they come in, they say, this has been nice to get out of the house and, you know, feel safe and talk to somebody.

INSKEEP: I get the impression, though, Scott, that people are still categorizing things as essential and nonessential. You got to get to the dentist eventually, but maybe you don't need to go out to the movies.

HORSLEY: And you might be more willing to put up with some safety precautions in the dentist's chair than you would be sitting at a fancy restaurant.

We do know that, you know, spending has dropped, and that is keeping a lid on economic activity. And it was a decline in consumer spending that really led to that sharp contraction in the economy in the second quarter. It might have been even worse, though, were it not for the huge amount of federal spending and relief payments that went out. Federal Reserve Chairman Jerome Powell said yesterday those $1,200 relief payments and the supplemental unemployment benefits have been an important lifeline keeping the economy afloat.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: In a broad sense, it's been well spent. It's kept people in their homes. It's kept businesses in business. And that's all a good thing.

HORSLEY: Now, of course, those supplemental unemployment benefits are expiring tomorrow, and Congress seems to be stuck as they try to figure out what kinds of additional support both families and businesses might need to keep the economy from sliding backwards again.

INSKEEP: Scott, thanks so much. Really appreciate it.

HORSLEY: My pleasure, Steve.

INSKEEP: That's NPR's Scott Horsley. Transcript provided by NPR, Copyright NPR.