• Thomas Parker

U.S. economy contracts 9.5% in Q2

The U.S. economy contracted 9.5% in the second quarter of 2020, which is the steepest decline since the Great Depression.

Gross domestic product shrank 32.9% on an annualized basis, down significantly even from a negative 5% annualized decline in the first quarter of 2020 according to new data released by the Commerce Department on Thursday. A revised figure for Q2 GDP will be released in late August based on more complete data.

According to the Bureau of Economic Analysis, the coronavirus and the shutdowns had a significant effect on the U.S. economy:

"The decline in second quarter GDP reflected the response to COVID-19, as "stay-at-home" orders issued in March and April were partially lifted in some areas of the country in May and June, and government pandemic assistance payments were distributed to households and businesses. This led to rapid shifts in activity, as businesses and schools continued remote work and consumers and businesses canceled, restricted, or redirected their spending."

The decrease in GDP resulted from marked decreases in personal consumption, exports, investment, and state and local government expenditures. These decreases were only partially offset by a significant increase in spending by the federal government, mostly on transfer payments from expanded unemployment benefits as well as the direct payments of $1,200.

Notably, Americans' incomes increased significantly in the quarter, mostly from the transfer payments, and the data show they placed the funds into savings.

According to the same report, personal income increased $1.39 trillion in the second quarter, up from $193 billion in the first quarter. Personal outlays (spending) decreased $1.57 trillion following a decrease of $232 billion in the first quarter. Personal saving was $4.69 trillion in Q2, up from $1.59 trillion in Q1, and the personal saving rate jumped to 25.7%, up from 9.5%.

While this data could mean that the economy will rebound significantly in the third quarter, the transfer payments from the federal government are not permanent, meaning the economy will have to rely on organic economic growth in the future.

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