Wall Street and the American economy
When we talk about the economy, we often do so in terms of a nation’s Gross Domestic Product, or GDP. GDP is the total dollar-value of goods and services produced by a nation over a specific time, usually a year. It serves as the main indicator on the health of a nation’s economy.
At the start of the year, many economists were projecting the U.S. economy to grow by 3%-3.5%. This would have been the fastest rate of economic growth since 2004-05, even outpacing the stellar 2.3%-2.9% growth rates of the past few years. But government-imposed closures and restrictions started in March, which pulled down the January-March second quarter to -5%.
On Thursday, the U.S. Department of Commerce released its latest GDP Report, giving Wall Street its first glimpse of economic growth in the April-June second quarter. As expected, the result was brutal. Economic growth declined by 32.9%, though slightly better than Wall Street’s forecast of a 35% decline.
The second quarter GDP Report reflects the brunt of economic fallout – both domestically and globally – from the COVID-19 pandemic. It was the largest quarterly decline on record, dating back to 1947. For perspective, the second largest decline was 10%, set in the first quarter of 1958.
The pandemic’s impact on the second quarter U.S. economy has been broad-based. Few have been spared. However, the biggest hit was to consumer spending, which drives more than two-thirds of America’s total economic growth. In the second quarter, consumer spending fell at an annual rate of 34.6%. More than 90% of this decline was caused by a massive reduction in household consumption of services.
Other sizable reductions were noted in fixed investments – the big-ticket purchases by businesses of factories, equipment and technology – which fell by 27%. Residential housing fell by 38.7%. Exports and imports declined by 64.1% and 53.4%, respectively, reflecting the heavy toll the pandemic has placed on global trade. The main contributor to second quarter growth was government spending, which rose by 2.7%.
With the U.S. stock market at/near its all-time high, it’s clear the focus for Wall Street is not on the past, but the future. It’s not rehashing a brutal second quarter we all expected, but instead, focusing on the economy’s path to recovery.
The worst of the economic fallout was in April. In May and June, economic data confirmed the economy is now in “recovery mode.” For Wall Street, the speed and duration of this recovery has now taken center stage.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
