Worst-Ever 32.9% GDP Growth Decline In US

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The U.S. economy saw the biggest quarterly plunge in activity ever, though the plummet in the second quarter wasn’t as bad as feared.
Gross domestic product from April to June plunged 32.9% on an annualized basis.
Economists surveyed by Dow Jones had been looking for a drop of 34.7%.
Still, it was the worst drop ever, with the closest previously coming in mid-1921.

The report comes amid a recession that began in February and pulled first-quarter growth down 5%.
Its a near 10% quarter-over-quarter decline
Neither the Great Depression nor the Great Recession nor any of the more than three dozen economic slumps over the past two centuries have ever caused such a sharp drain over so short a period of time.
By comparison, the worst quarter during the financial crisis of 2008 was the 8.4% GDP drop in the fourth quarter of that year.

What is the reason?

About half the quarter reflecting almost full shutdown and the other half the slow reopening.
This has led to precipitous fall in consumption — the biggest component of American GDP that accounts for almost 70% of the economy.
Spending on goods and services is estimated to have fallen at a seasonally adjusted annualised rate of 35% in the second quarter.
This alone lops off 25 percentage points from headline growth

Investments in buildings, equipment and intellectual property —big manufacturing sector drivers —
Also fell at an annual rate of 49%.

This pandemic caused a sharp drop in real personal income as many workers faced lower wages, fewer hours or job severance.
Expanding unemployment insurance, economic recovery rebates and emergency loans enacted as a part of the CARES Act, caused post-transfer real disposable personal income to increase.
In early estimates from the University of Pennsylvania, the CARES Act reduced the GDP contraction in the second quarter by 7 percentage points.

Pessimism can be attributed to the sharp surge in COVID-19 cases, particularly in the southern and southwestern US states, that has pushed the death tally above 150,000 and the growth in daily cases above 60,000 – triple what it was in early June.
After many states lifted their lockdown orders in April and May, COVID-19 cases began a sharp climb in June, with the result that rebounding economic activity sputtered.

There are inherent similarities in the two countries.
Both the US and China are driven by consumption — over two-thirds of US GDP and more than one-half that of China.
In their relief packages too, both countries focussed on boosting consumption by attempting to put money in the hands of consumers.
The US managing that directly through the ‘cheque in the mail’ and the Payroll Protection programmes.
China, through a pre-paid voucher scheme for specific products and a few other policies.
But China’s GDP growth showed a sharply divergent trend, swinging back sharply into the black in the April-June quarter,
Driven by a bounceback in manufacturing output and a public spending boost.

In India, like in the US, the case count is surging, even as the government is progressively easing up restrictions.
Two days after the Union Home Ministry announced further relaxations in the lockdown guidelines, including opening up gyms, India recorded the biggest jump in the daily case count at over 55,000.
While the share of consumption to GDP, at 57% in India, is closer to that of China,
But the trend of normalisation of consumption is akin to what is being experienced in the US —
Uncertainties preventing people from upping their spends beyond essentials, the progressive unlockdowns notwithstanding.
India’s recovery could have another problem.
Unlike in China and the US – where the efforts to put money directly into the hands of the people,
In India, much of the Rs 20 lakh crore Covid-19 economic package announced on May 12 has been liquidity driven, with little burden on the Central exchequer.