US economy suffers sharpest postwar quarterly contraction

The US economy contracted the most in postwar history in the second quarter as unprecedented shutdowns closed businesses and left millions of Americans out of work during the pandemic.

Gross domestic product, or the value of all goods and services produced by the economy, shrank at an annualised rate of 32.9 per cent, according to a preliminary estimate from the Bureau of Economic Analysis on Thursday.

That was smaller than economists’ forecast for a 34.1 per cent decline. The economy contracted 9.5 per cent compared with the preceding three months, which is the metric used by other major economies. The data landed just a day before the expiry of supplemental jobless aid for the total 17m unemployed.

The BEA said the decline in GDP reflected a slump in personal spending, exports and business investment. The imposition and subsequent lifting of stay-at-home orders “led to rapid shifts in activity”, the BEA added, “as businesses and schools continued remote work and consumers and businesses canceled, restricted, or redirected their spending”.

The sudden drop in economic activity last quarter exceeded the previous record of a 10 per cent contraction in the first quarter of 1958, according to figures dating back to 1947. GDP contracted by an annualised 5 per cent in the first quarter, as the lockdowns imposed in response to the pandemic brought an end to the longest expansion in history.

As attempts are made to gradually reopen the economy, recent data pointed to improving trends late in the second quarter. Employers added a combined 7.3m jobs in May and June, following a record loss of 20.5m payrolls in April. Consumer spending also picked up, and pent-up demand and record-low mortgage rates helped drive home sales sharply higher last month.

But flare-ups in coronavirus cases have raised concerns of a rockier recovery than hoped. Some economists believe the labour market’s recovery may have stalled, with parts of the US south and west renewing curbs on business and consumer activity in hopes of stomping out outbreaks of Covid-19. The Federal Reserve warned on Wednesday the fate of the world’s largest economy would “depend significantly on the course of the virus”.

Figures released on Thursday showed that initial applications for unemployment benefits totalled 1.43m on a seasonally adjusted basis last week, nearly even versus the prior week, when there were 1.42m new jobless claims. Economists were looking for 1.42m new claims last week.

Lawmakers in Washington remain locked in negotiations over whether to extend supplemental jobless aid beyond July. Republicans have proposed reducing the amount of extra benefits to $200 weekly from the $600 that was included as part of a $2.2tn stimulus package passed in March. Democrats put forward a bill that would keep those payments the same.

The number of Americans actively collecting unemployment cheques rose to 17m from 16.2m in the week that ended on July 18. Continuing claims, which peaked at 24.9m in May, equalled 11.6 per cent of the workforce. The insured unemployment rate was 11.1 per cent a week earlier.

Initial claims in the federal Pandemic Unemployment Assistance programme, which extended aid to the self-employed or other individuals who would not qualify for regular unemployment compensation, were down last week to 829,697 from 936,073 on an unadjusted basis.