- Economy suffers worst quarterly decline in history.
- Consumer spending, especially for vehicles, rises.
- Housing momentum continues.
Daily new COVID-19 cases in the U.S. are declining again, but the impact of higher risk and more restrictions on activity across much of the country has diminished economic activity resulting in an increase in people filing for unemployment benefits.
One clear bright spot is the housing market, which is recovering strongly as demand is strengthened by historically low mortgage rates. Consumer sentiment declined in July but may be starting to stabilize if not improve. Economic uncertainty is now growing with the expiration of many of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions.
Economy shrinks: The economy shrank 33% in the second quarter as a result of the lockdowns and reduced spending and investment, especially in April. It was the worst quarterly decline in the history of the GDP data, which started after World War II. As the months progressed through the quarter, spending has been recovering. It has been especially strong in durable goods like cars and furniture. Incomes have been boosted thus far by fiscal stimulus, but we’re already seeing the impact dissipate as incomes declined in June. The Q2 decline leaves real GDP down 9.5% for the year, which was a record decline.
June spending hike: Consumer spending in total increased 5.6% in June with increases in spending on durable goods, non-durable goods, and services. Spending on durable goods and used and new vehicles outpaced nondurable goods and services in aggregate, but some categories like furniture and home furnishings, healthcare services, apparel and gasoline saw even stronger rebounds. The increase in spending combined with the decline in income led to a decline in the personal savings rate to 19%, but that was still the third-highest savings rate in the history of the data with only April and May higher.
Housing bright spot: Housing does not appear to be losing momentum. Pending home sales increased strongly again in June so that contracts to buy newly constructed homes as well as existing homes are up year over year. With mortgage rates at all-time lows, and the demographics of homeowners less likely to be negatively impacted by job losses, housing is likely to outperform most other sectors this year.
Joblessness remains high: Initial jobless claims were 1.43 million for the week ending July 25, which was an increase of 12,000 from the prior week’s 1.42 million. Continuing claims, which represent people who previously filed and were approved and remain on unemployment compensation, increased to 17.0 million from 16.2 million. That represents 11.2% of February’s job total. Continuous claims increased by almost 900,000 from the prior week, thus losing half of the gains earlier in July. Continuing claims data lag a week behind initial claims, so this week will likely show further losses. Since Congress has not been able to get consensus on a new stimulus bill, all of the unemployed will start experiencing more financial distress starting next week.
Check back on Smoke on Cars tomorrow for a video that will include updated data.