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The COVID Bill Comes Due with Q2 US GDP

All throughout the COVID-19 shutdown, everyone from talking heads to economists to politicians spoke about second quarter GDP in ominous terms – a data point that was way down the road at the time.

So now here we are. The advance estimate of second-quarter GDP will be released Thursday morning, and it will be bad. On the upside, it likely represents the low point and will be at least partially dismissed as an anomaly. In any case, the weakness shouldn’t surprise anyone.

Three closely watched GDP nowcast measures, which attempt to forecast GDP in real time, all predict a double-digit decline, with two of the measures looking for a decline of more than 30%.

To put that into perspective, the largest drop in the series since quarterly estimates were first published in 1947 was a 10% decline in the first quarter of 1958. The largest annual decline on record back to 1930 was during the Great Depression in 1932, when GDP fell by 12.9%.

The difference for 2020 compared to those two historical examples is that a quick rebound is expected in the third quarter this year, perhaps a large one if the COVID-19 rebound can be contained.

Declines are expected for all the GDP components in the second quarter data, particularly consumption. However, retail sales gains in both May and June helped to partially offset the April plunge and start off third quarter consumption on a solid footing.

Contraction is also expected for fixed investment and government spending, while both exports and imports fell throughout the quarter as COVID was a global issue. As with consumption, much will depend on the missing June figures for inventories and trade.

Advance estimates for June retail and wholesale inventories and census goods trade will be released on Wednesday and will be incorporated into Thursday’s GDP data.

Annual revisions to the GDP data will be released with Thursday’s report. The revisions extend back five years, but usually don’t change the general track of GDP over the period.

Further income, PCE gains seen for June

Nonfarm payrolls rose by 4.8 million in June, only partially offset by a decline in the average work week and a 1.2% drop in hourly earnings. As a result, wages and salaries should give a further boost to personal income in Friday’s release.

New initial jobless claims filings slowed modestly in June, but remained well above 1 million per week. As a result, the state unemployment category should also rise, while additional stock gains should lift return on assets after a May decline.

The current transfer receipts category fell sharply in May after an April spike, reflecting the timing of the stimulus payments. This category should be more stable in the June data, but could see substantial declines going forward if Congress does not pass additional measures, particularly a renewal of expanded unemployment benefits.

Proprietors’ income ticked up in May due to the return of some businesses. This should carry over into June due to the pick-up in consumer spending.

The 7.5% gain in June retail sales was significantly smaller than the 18.2% gain in May, but the strong increase will still push PCE higher for both goods and services.

The savings rate fell to 23.2% in May from 32.2% in April and should decline further in June as spending increased. However, it will remain elevated compared to pre-COVID levels as uncertainty and social distancing regulations remained.

Consumer prices rebounded in June, according to the BLS’s CPI measure, suggesting both overall and core PCE prices will follow suit after modest gains in May.

As a result of the expected jump in nominal PCE, real PCE should also advance even if the PCE price index posted a larger increase. Even so, real PCE gains in May and June will not be enough to offset the 12.2% drop in April PCE and the consumption category will remain a key subtraction from Q2 GDP.

As with GDP, annual revisions to the personal income data will be released with the report on Friday.

COVID resurgence to impact consumer confidence

The Conference Board’s measure of consumer confidence, released on Tuesday, should reflect the continued reopening of some states – and the steps backward in others due to the resurgence of COVID cases.

The preliminary Michigan Sentiment index fell to 73.2 in July after rising to 78.1 in June, with declines in both the current conditions and expectations readings. The University of Michigan directly attributed the decline to the resurgence of cases in several states. The updated Michigan data for July will be released on Friday.

Regional data to this point suggest expansion

The Empire State, Philadelphia Fed, and Kansas Fed regional data all point to expansion for the manufacturing sector in July, suggesting that the national ISM reading will remain above the 50.0 break-even point when it is released on August 3 after climbing to 52.6 in June.

The flash Markit manufacturing index rose to 51.3 from 49.8 when it was released earlier Friday, signaling expansion for the first time since February.

Other regional data from the Dallas and Richmond Fed banks and the Chicago PMI will be released in the coming week.

For the services sector, the regional data from the Philadelphia Fed and Kansas City Fed both indicated expansion, while the flash Market services index rose to 49.6 from 47.9, just below the break-even point.

Additional services data from the Dallas and Richmond Fed banks will be released next week ahead of the ISM Services index released on August 5.

Jobless claims benefits hang in the balance

After their first increase in four months, which was partially due to seasonal adjustment issues, initial jobless claims are likely to slip back in the July 25 week, but remain elevated as expanded benefits are due to expire on July 31.

The stimulus measures passed in April added an extra 13 weeks to the usual state unemployment benefits, so anyone displaced due to the COVID shutdowns will continue to receive assistance through September at least, and likely longer.

However, the extra $600 a week that was added to checks by the stimulus measures will not be included in August and beyond unless further government action is taken.

If nothing else is done, it may discourage anyone who has not filed already to consider whether it is worth the effort for only the state portion.

However, it’s more likely that anyone eligible has already filed and the weekly additions reflect backlogs that are still being worked down and second filings by those that were hired and then laid off again.

FOMC to meet, discuss, but do little at this point

When the FOMC meets on Tuesday and Wednesday, it will have much to discuss, but little to do. After suggesting at their June meeting that rates are likely to remain near zero for the foreseeable future and having implemented multiple special programs to prop up the economy, the FOMC will now need to use words to reassure Wall Street and Main Street.

There is no doubt that the economic data have improved since their last meeting, but the recent resurgence of COVID cases, and the subsequent reversal of some state reopenings, muddies the waters a bit. The Fed will need to balance these two competing factors in their statement and Chair Powell’s press conference.

Kevin Kastner

Julie Ros

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