US economy shrank at record-breaking 33% rate last quarter

The U.S. economy shrank at a dizzying 32.9% annual rate in the April-June quarter — by far the worst quarterly plunge ever — when the viral outbreak shut down businesses, throwing tens of millions out of work and sending unemployment surging to 14.7%, the government said Thursday.

The Commerce Department’s estimate of the second-quarter decline in the gross domestic product, the total output of goods and services, marked the sharpest such drop on records dating to 1947. The previous worst quarterly contraction, a 10% drop, occurred in 1958 during the Eisenhower administration.

Last quarter’s drop followed a 5% fall in the January-March quarter, during which the economy officially entered a recession triggered by the virus, ending an 11-year economic expansion, the longest on record in the United States.

The contraction last quarter was driven by a deep pullback in consumer spending, which accounts for about 70% of economic activity. Spending by consumers collapsed at a 34.6% annual rate as travel all but froze and shutdown orders forced many restaurants, bars, entertainment venues and other retail establishments to close.

Business investment and residential housing also suffered sharp declines last quarter, with investment spending sinking 27% and residential housing plunging 38.7%.

State and local government spending, diminished by a loss of tax revenue that forced layoffs, also fell at an annual rate of 5.6%.

But overall government spending was up 2.7%, powered by a 17.4% surge in federal spending, reflecting the more than $2 trillion in relief packages that Congress enacted to provide $1,200 payments to individuals, aid to small businesses and supplemental unemployment benefits.

The job market, the most important pillar of the economy, has been severely damaged. Tens of millions of jobs vanished in the recession.

More than 1 million laid-off people have applied for unemployment benefits for 19 straight weeks. So far, about one-third of the lost jobs have been recovered, but the resurgent virus will likely slow further gains in the job market.

President Donald Trump has pressured states to reopen businesses despite concerns that the virus remains a threat to workers and customers at many service industry jobs that require frequent face-to-face contact.

So dizzying was the contraction last quarter that most analysts expect the economy to produce a sharp bounce-back in the current July-September quarter, perhaps of as much as 17% or higher on an annual basis. Yet with the rate of confirmed coronavirus cases having surged in a majority of states, more businesses being forced to pull back on re-openings and the Republican Senate proposing to scale back government aid to the unemployed, the economy could worsen in the months ahead.

The Trump administration is betting against that outcome in asserting that the economy will undergo a V-shaped recovery in which last quarter’s plunge would be followed by an impressive rebound in the current quarter — a hoped-for dose of good news that would be reported in late October, not long before Election Day.

Yet many economists note that the economy can’t fully recover until the pandemic is defeated — a point stressed Wednesday at a news conference by Federal Reserve Chair Jerome Powell. The Fed chairman warned that the viral epidemic has been endangering a modest economic recovery and that as a result, the Fed plans to keep interest rates pinned near zero well into the future.