US Economy Charter and Dow Jones: Economy shrivels while stocks are under spotlight 

Summary

• On 30 July, both Dow Jones and S&P 500 indices fell 0.85% and 0.38%, respectively, prompted by worst fall of 32.9% in the US GDP numbers in Q2 period, highlighted by Bureau of Economic Analysis.
• Sharp plunge in consumer spending was the main driver to push the US economy to plunge down in Q2 period.
• Labor market recovery is also under pressure, as outlook has become more uncertain, with about 1.43 million filings for jobless benefits in the week ended 25 July.
• The economic recovery depends on other relief packages coming up, and if the virus cases are controlled in the US.

On 30 July, the US stock market opened on a low note, after jobless claims surged to 1.43 million in the week closed 25 July, reflecting an increase of 12,000 compared to the last week and amid historic fall of 33% in Q2 GDP prompted by coronavirus caused shutdown.

The Dow Jones Industrial Average market index fell 0.85% and closed at 26,313.65, while S&P 500 index lost 0.38% to settle at 3,246.22. However, Nasdaq Composite index added 0.43%, ending the day in green at 10,587.81points, as on 30 July.

Further, lack of progress in talks between congressional Democrats, Republicans, and the White House on new coronavirus relief package, which is due to expire on 31 July also weighed on the weak sentiments.

The US financial markets, oil prices, and dollar slipped on 30 July as new data underlined the economic fallout because of coronavirus. Also, President Donald Trump indicated that the November election could be postponed.

Asian shares turned lower amid dismal US economic data and rising cases of coronavirus globally even after strong tech earnings in the US, and recovery of manufacturing in China and Japan.

On 31 July, Shanghai Composite index gained 0.71%, Hong Kong’s Hang Seng index lost 0.47%, while Japan’s Nikkei 225 fell down by 2.82%. Stoxx 600 Europe Index, at the time of writing was trading in green, gaining 0.56%, and UK’s FTSE 100, at the time of writing, was trading in red, slipping down by 0.14%.

The US dollar was also poised for its worst month in a decade, hoping that the Fed would retain for years, its ultra-loose monetary policy. Gold futures sank by 0.57% to settle at $1,942.30 an ounce on 30 July, after plunging down on 29 July.

The US economy shrank record 32.9% in Q2

The US economy plunged at an annual rate of 32.9% between April and June, as reported by the Bureau of Economic Analysis, suffering steepest contraction by far as the nation continues to battle coronavirus.

The US economy stepped into recession in February, and the economy shrank 5% in Q1 of 2020 compared to the same period a year ago.

Earlier, the worst reading on the US GDP was recorded, when the US economy shrank 10% in Q1 before coronavirus lockdowns were imposed.

A sharp contraction in consumer spending was the main driver to push the economy into its Q2 fall. Consumer spending shrunk by record 34.6% on an annualised basis and the drop was quite deep in services like travel, tourism, medical and eating out.

Businesses that depend on large consumer groups and heavy store traffic suffered the brunt of government lockdowns following the pandemic. Expenditure on utilities tumbled at an annual pace of 43.5%. More cars, food and some other household items were bought by Americans while sales of clothing, gasoline and many other goods dropped sharply.

A fall in exports, inventories, business, and residential investment, as well as state and local government spending added to the historic weakness.

Prices for household purchases, a key measure of inflation, dropped by 1.5% for the period from a 1.4% rise in Q1 when GDP dropped by 5%. However, personal income surged due to large government transfer payments related to coronavirus pandemic. Current-dollar personal income increased more than six-fold to $1.39 trillion, while disposable personal income soared 42.1% to $1.53 trillion.

Stalling labour market recovery

The record quarterly plunge in economic growth came as another 1.43 million Americans filed for unemployment benefits in the week ending 25 July, a second consecutive rise in weekly jobless claims since bottoming out of the labor market in March. About 30 million Americans are accumulating unemployment benefits from the state and federal programme, but their income is set to fall substantially.

A new federal relief program for the so-called gig workers totalled 829,607 last week. The number of people already accumulating economic benefits rose by 867,000 to 17.06 million showing that workers are staying longer on unemployment rolls while rehiring has slowed down.

Economists have stated that layoffs are increasing, as the virus continues to spread through the South and West, and bars and restaurants have to scale back operations. Sharp employment growth in May and June had boosted labor market optimism, but analysts stay worried that nonfarm payroll growth might be slower in July.

In June, the economy gained 4.8 million jobs whereas, July employment data is due to be reported on 7 August.

The US initially promised to pay laid-off people an extra $600 in benefits per week, but that extra payment will expire on 31 July, and its replacement is yet to be settled.

Federal Reserve increased funding worth trillions of dollars to keep liquidity flowing to companies and families, while Congress splashed out $3 trillion in expenditure on virus relief assistance as millions are losing their jobs.

Jerome Powell, Chairman of Federal Reserve, stated that the increase in unemployment has been harsh majorly for lower-wage personnel, for females along with African Americans and Hispanics. He also revealed that the trajectory for economic recovery has been decelerating, and whatever path the economy would take remains contingent on the intensity of the COVID-19 spread.