Rebecca Davis, who owns two women’s fashion boutiques in Franklin, Tennessee, says revenue surged to about 85% of normal levels when she reopened in late April after being closed for six weeks amid the coronavirus pandemic.
But sales increasingly slowed in June and July, a pullback that she says may be partly due to COVID-19 spikes. In recent weeks, Tennessee has broken daily records for coronavirus cases and Williamson County began requiring people to wear masks in public.
This month, she estimates, sales are down about 30% from a year ago and she’s roughly breaking even but believes better times lay ahead.
“It’s been a rough several months,” says Davis, who used a forgivable federal loan to hold on to her 12 employees. “I’m just glad to be open.”
Business owners like Davis are struggling to dig out of a massive hole in the economy, laid bare Thursday in a government report showing the nation’s gross domestic product contracted at a seasonally adjusted annual rate of 32.9% in the second quarter, its worst performance on record.
But even as the economy takes two steps forward, infection surges across much of the country have set it a step back.
The backslide was exemplified in a separate report that the number of Americans filing initial jobless claims – a rough measure of layoffs – last week rose to 1.42 million, the second straight weekly increase after 15 weeks of declines. A stunning 54.1 million workers have sought unemployment benefits since March.
Most of that turmoil in the labor market came during the economy’s brutal economic slide in the April-June period. The free-fall was driven by a historic 34.6% pullback in consumer spending as states closed down restaurants, malls, movie theaters and other outlets, and Americans avoided public gathering spots and travel out of contagion fears. Nearly every corner of the economy was battered, including business investment, housing, trade and government outlays.
“The GDP numbers are mind-boggling,” said Ian Shepherdson, chief U.S. economist of Pantheon Macroeconomics.
The contraction followed a 5% slide in economic output in the first quarter.
But the nation’s steepest-ever recession is also expected to be the shortest, with consumer spending, job growth and other key measures bouncing back sharply in May and June as states began allowing businesses to reopen in phases and many employees were rehired.
About $2.5 trillion in federal government aid also propped up spending, including forgivable loans to small businesses that retained or brought back workers, as well as $1,200 checks to individuals and a $600 supplement to weekly state unemployment benefits.
Every state was walloped last quarter, though ones that rely heavily on travel and tourism, such as Hawaii and Nevada, were hit hardest by the downturn, according to employment figures analyzed by economist Adam Kamins of Moody’s Analytics. Michigan, the heart of the nation’s auto industry, was slammed as consumers put off car purchases. And densely populated Northeast states struck by the most severe virus outbreaks – like New York, New Jersey and Massachusetts – absorbed among the heaviest economic losses as governors shut down earlier and residents stayed home.
Meanwhile, more rural states with less virulent outbreaks, such as Idaho, Utah, Oklahoma, Arizona and Nebraska, were more insulated from economic damage, Kamins sajd. Those patterns are now largely reversing, with initially lax states suffering COVID-19 surges.
Recent jumps in coronavirus cases across much of the South and West have led at least 20 states to pause or roll back reopening plans, dampening the anticipated recovery in the second half of the year. The number of hours worked in states such as Texas, Florida and Arizona recently has declined, according to Homebase, a supplier of employee scheduling software.
After the nation recouped about a third of the 22 million jobs lost early in the crisis in May and June, a chunk of those gains could be erased in July with millions of jobs shed, said economist Kathy Bostjancic of Oxford Economics.
Many analysts still expect the hot-spot states to resume reopening after the outbreaks are tamed in the next month or so, helping America’s economy bounce back and dodge another recession. Scott Anderson, chief economist of Bank of the West, estimates the economy will grow an annual rate of 17.3% in the third quarter and 4.9% in the fourth quarter, assuming Congress passes another $1.5 trillion to $2 trillion stimulus package.
With some businesses closing for good and millions of workers laid off permanently, Barclays reckons the nation’s economic output won’t return to its pre-pandemic level until early 2022. And Moody’s Analytics figures a return to pre-pandemic employment levels won’t come until 2023.
“Our business is slim to none right now,” said Michael Vander Hook, president of Freight Motion, a broker for truck shipments, “We typically would be growing at this time” of year as retailers stock goods for the holidays.
But Vander Hook said his business saw revenue fall 90% in April compared to a year ago before rebounding modestly in May. Still, it remains 70% below year-ago levels.
Suppliers, he says, are shipping food to grocery stores but not much of other products. And with many small businesses going bankrupt, he sees little prospect of a noticeable pickup in coming months. Vander Hook used a federal loan to hold on to three of the five employees he had pre-pandemic but won’t be able to keep them without an upswing in business or more federal aid.
“I can’t run at 30%,” he says.
Consumer spending nosedives
Consumer spending plummeted 34.6%, the largest drop on record, after sliding 6.9% in the first quarter. The state shutdowns and Americans’ contagion fears combined with massive layoffs, prompted shoppers to halt much of their discretionary outlays.
Consumption makes up about 70% of economic activity.
Business investment tanks
Business investment sank a record 27%, after a 6.7% drop in the first quarter. The culprits were business and factory closures, along with uncertainty about the outbreak’s economic effects. Spending on equipment such as computers and factory equipment dropped 37.7%, while outlays on buildings, oil rigs and other structures declined 34.9%.
Companies draw down inventories
Instead of adding to their stockpiles, firms drew from existing supplies to meet sharply reduced demand, contributing nearly 4 percentage points to the drop in GDP.
Residential investment plunges
Housing construction and renovation broke a string of three straight quarterly increases, tumbling 38.7%. Despite historically low mortgage rates, the outbreak suspended construction projects and prompted homebuyers to stay on the sidelines.
Overall, though, housing is the economy’s biggest bright spot, with housing starts rebounding strongly in May and June after slumping in March and April as rock-bottom mortgage rates attracted buyers.
Government spending rises
Government outlays represented the biggest positive for the economy as federal spending jumped 17.4%, bolstered partly by the stimulus measures. The increase more than offset a 5.6% drop in state and local government spending amid falling tax and other revenue and school closures.
Trade aids growth
U.S. exports fell 64.1%, hammered by stricter lockdowns overseas than in the U.S., while imports decreased 53.4% as Americans substantially cut their spending amid the shutdowns.
Since the drop in imports more than offset the decline in exports in absolute terms, the nation’s trade gap narrowed, adding slightly to economic growth.
Bottom line
The economy is already on the mend but faces a tortuous comeback in the face of virus flare-ups in parts of the country and the risk of a second COVID-19 wave in the fall. A more sustained rebound in consumer spending isn’t expected until a vaccine is available sometime next year and Americans are emboldened to travel and spend freely.
Even then, deep bruises will linger as a result of permanently laid-off workers who will struggle to find new positions, or retire, and businesses that will never reopen.
“We expect it will take years for that damage to be fully reversed,” said Andrew Hunter, senior U.S. economist at Capital Economics.