It appears that despite record stimulus spending by the
Federal Reserve and copious government bailouts, it did not pull the US economy
out of its deeply troubled recession.
According to Commerce Department data released on Wednesday,
the US economy contracted by a 31.4% annualized rate in the second quarter of
2020 – the steepest drop on records that date back to 1947. Although estimates
last month called for a 31.7% drop. To put the dire state of the US economy
into context, the last time a quarterly drop of such a magnitude occurred was
in 1958, when the economy contracted by 10% on an annualized basis.
With respect to the third quarter which just ended in
September, the GDP results will not be made public until October 29, which is
only a mere five days before the US presidential election. Although US
President Donald Trump is anticipating an economic rebound to factor into a
potential second term, a number of economists are becoming increasingly
pessimistic about a surge in economic growth. Moreover, the US economy could
very easily plunge into an even deeper recession if Congress fails to arrive at
another stimulus bill, or the pandemic resurfaces into a third wave.
Indeed, the lack of a stimulus bill is certainly having a
toll on US consumers, which have grown reliant on the $600 per-week benefit
top-up that expired at the end of July. Although weekly initial jobless claims
have fallen below 1 million for several consecutive weeks in a row now, there
are still millions of Americans that are dependent on the government’s two
other stimulus pillars, the Pandemic Unemployment Assistance (PUA) and the
Pandemic Emergency Unemployment Compensation (PEUC), which are both set to
expire at the end of December.
In the meantime, August data shows that personal income
growth dropped by only 2.7%, while personal income declined by 2.7%. The
decline in income was attributed to the elimination of the $600 weekly top-up,
but was then partially offset by a slight improvement in the labour market,
which caused salaries and wages to rise by 1.3% in August. On the other hand,
personal spending also rose above expectations, increasing by 1%. Alas, a rise
in spending may seem like an optimistic variable in a potential economic
recovery, but there is just one problem: a decline in personal income paired
with increased consumption means that many Americans have been burning through
their savings.
Indeed, according to BEA data the month of August saw
annualized savings fall by $723 billion to $2.435 trillion, which is the lowest
it has been since the beginning of the pandemic in March. Simultaneously, the
personal savings rate crumbled by 17.7%, which suggests that the 60% in savings
that was accumulated following the CARES Act stimulus has all been burned
through. This means that unless Congress introduces yet another stimulus bill,
and soon, US consumption will likely once again collapse, and further push the
US economy into the dark abyss.
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