IHS Markit said in advance of Thursday’s release of the first estimate of second-quarter gross domestic product (GDP) by the Bureau of Economic Analysis (BEA) that U.S. GDP will contract by an historic 35.3 percent annualized rate.
“This would be far and away the steepest one-quarter decline in quarterly data dating back to 1947,” Ben Herzon, senior economist for IHS Markit, said. “To put this in a recent historical context, the worst quarter of the Great Recession was the fourth quarter of 2008, when real GDP contracted at an 8.4 percent annual rate.”
This followed a GDP decrease of 5 percent in the first quarter of the year, according to BEA. The final, inflation-adjusted GDP estimate included an upward revision to nonresidential fixed investment that was offset by downward revisions to private inventory investment, personal consumption expenditures (PCE) and exports.
BEA said the decline in first quarter GDP reflected the response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. This led to rapid changes in demand, as businesses and schools went remote or canceled operations, and consumers canceled, restricted or redirected their spending.
IHS said the largest contributor to the decline in second-quarter GDP is an estimated 35.3 percent annualized decrease in real PCE, which takes away about 25 percentage points from GDP growth. PCE for June will be reported by BEA on Friday in the Personal Income and Outlays report.
Other contributors to the second-quarter weakness include declines in inventory investment, net exports, nonresidential fixed investment and residential investment, which each subtract from GDP growth, but by far smaller amounts, IHS noted.
“Implicit in the dramatic second-quarter decline in GDP is the beginning of recovery, as a huge decline in monthly GDP in April is partially reversed by increases over May and June,” Herzon said. “For the third quarter, we currently forecast an annualized increase of 20 percent.”
He said a robust growth forecast for the third quarter mainly reflects the estimated recovery through June that raises the level of third-quarter GDP relative to that of the second quarter. Several of what he called “high-frequency indicators,” though, support the IHS estimate of a material slowdown in the pace of recovery beginning in July, as households and businesses curtailed activity in response to a resurgence of new COVID-19 infections.