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Economic Forecasts

A Historically Bad Second Quarter, but Recovery Has Begun

Kiplinger’s latest forecast for the GDP growth rate

GDP in the second quarter dropped 32.9% at an annual rate. Consumer spending slumped by 34.6%, with the biggest declines in services, gasoline and clothing. However, spending on recreational goods and motor vehicles rose, as stimulus checks provided households with enough spare cash for fun items or a down payment on a car, SUV or pickup truck.

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In fact, consumer disposable income rose 9.2%, even though total wages and salaries dropped 7.1%. Proprietor income was hit the hardest, falling 13.2%. Consumers hedged against the economic uncertainty by saving 25.7% of their income, a big leap from the 9.5% rate in the first quarter.

Business investment fell 27%, as businesses cut back their spending on equipment, buildings and inventories. The trade balance improved a small amount. Even though exports dropped 64.1% and imports fell “only” 53.4%, the overall trade balance improved because imports are so much bigger than exports.

Federal government spending supported the rest of the economy in the second quarter, rising 17.4%. State and local government spending declined 5.6%.

Fortunately, the recovery has started. Third-quarter GDP should rise 15% or so at an annual rate. But that will depend on getting the second virus wave under control. Infection rates appear to have stabilized for now, at least. Also, there is potential drag from reductions in extra unemployment compensation and from businesses running out of PPP loan funds.

It will likely be 2022 before the economy returns to its level at the end of 2019. Expect 2020 GDP to decline 5.8%, with a smaller rise in 2021. 

Source: Department of Commerce: GDP Data

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