Company / Analytics

Analytics, 31 July 2020

US economy suffered its sharpest contraction

The U.S. financial system contracted the most in the postwar background in the second-quarter 2020 as restrictions to control the spread of Coronavirus rendered businesses closed, millions of people jobless, and reduction in social and economic activities.

The US GDP shrank at an annualized rate of 32.9%, according to preliminary estimates by the Bureau of Economic Evaluation (BEA) released on Thursday. The shrinkage was a scale-down from the 34.1% that economists had forecasted. The economic system contracted 9.5 for each cent in contrast with the previous three months, compared with the preceding three months.

The Bureau of Economic Evaluation noted that the decline in the GDP reflects a slump in personal spending, exports and business investment and that the imposition and subsequent lifting of stay-at-home orders “led to rapid shifts inactivity”.

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

However, recent data points to improving trends in the second quarter, as nations attempt the gradual reopening of their economies. For example, employers added a combined 7.3m jobs in May and June, following a record loss of 20.5m payrolls in April. Consumer spending has also picked up, and pent-up demand and record-low mortgage rates helped drive home sales sharply higher last month.

Still, the resurgence in coronavirus cases has raised concerns of an uncertain recovery than hopped. Some economists believe the labor market’s recovery may have stalled, as States in the Southern and Western US have imposed new restrictions on business and consumer activity to address the re-surge in cases. The Federal Reserve warned on Wednesday that the fate of the U.S economy will “depend significantly on the course of the virus.” The Fed’s latest meeting failed to provide any bright spots for investors, as it warned the US economy is stalling as coronavirus infections continue to rise. It kept interest rates on hold at between 0% and 0.25% and committed to keeping them low as the economy recovered.

Meanwhile, the US Congress is locked on 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. On the other hand, Democrats have put forward a bill that proposes to keep the benefits the same. Adjusted unemployment claims are increasing, with initial applications for benefits totaling 1.43, above economists forecast of 1.42m for the week.

How stocks reacted?

The S&P 500 dropped 41 points, or 1.2%, to 3,218 on opening. The fall was the steepest since records began in 1947 and three times worse than the previous all-time drop of 10% in 1958’s second quarter. It has since recovered as investors look forward to quarterly results from Apple, Amazon, Alphabet, and Facebook.

Markets were also spooked by the prospect of constitutional turmoil as US president Donald Trump raised the possibility of delaying the US election, repeating claims that the ballot would be affected by fraud due to an increase in mail-in voting. Trump’s comments drove US Treasury yields to their lowest level since early March, with 10-year treasuries falling 4.1 basis points to 0.5397%. In Europe, data showing Germany suffered its worst second-quarter contraction since the 2008 financial crisis, hit the country’s DAX 30 which plunged 3.5%. France’s CAC 40 slid 2.1% and Italy’s FTSE MIB dropped 3.3%.

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