CRU: Historic U.S. GDP Decline in Q2

Written by Anissa Chabib

By CRU Economist Anissa Chabib from CRU’s Global Economic Outlook

The estimate of U.S. GDP for Q2 2020 shows a decline of 32.9 percent q/q. This is the biggest drop on record, but slightly better than expected. Overall, the surprisingly good data on consumption, sentiment and production released in July is due to the reopening of businesses and the massive monetary and fiscal stimulus applied by the government. However, this fast rebound will lose momentum because of the alarming resurgence of Covid-19 cases, which is already leading to a reversal of reopening across the Sunbelt and weakening fiscal support.

CRU forecasts GDP to fall by 6.2 percent y/y in 2020 as a whole. We expect a drop in output in Q3 2020 at -8 percent y/y, followed by a moderate recovery and a rebound of 5.4 percent y/y in 2021. The latest data released for the U.S. economy revealed a faster-than-expected rebound for several leading indicators such as the unemployment rate (11.1 percent in June), personal spending (+8.2 percent m/m in May) and retail sales (+7.5 percent m/m in June).

As a result of the unexpectedly sharp rise in the ISM Manufacturing PMI in June, and in industrial production in Q2 2020, we have slightly raised our forecast for industrial production to a fall of 8.2 percent y/y in 2020 from a fall of 8.9 percent y/y last month.

However, the impressive recovery seen in May and June will decelerate in the coming months as Covid-19 cases surge and fiscal support fades. Some high frequency data, such as initial claims and consumer confidence, indicate that growth was stalling in early July. This supports our expectation of a slower recovery phase in Q3/Q4. The main risks to our forecasts are the surge in new cases of Covid-19 and the expiry of the extended unemployment insurance benefits in July. The former can bring some economic activity to a halt again. The latter is likely to have a strong negative impact on private consumption.

The expanded unemployment compensation, one of the main measures of the CARES Act, has helped millions of households to offset a drop in income from employment. As a result, we expect the U.S. government to include additional, though less generous, unemployment benefit support in the next rounds of fiscal stimulus in Q3 2020.

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