US GDP Drops 31.4% In Q2, But Economists Expect Record Recovery

The U.S. Commerce Department revised its second-quarter GDP estimate slightly Wednesday, reporting that the U.S. economy shrank by 31.4% in the second quarter. The new estimate is up slightly from the previous estimate of a 31.7% decline.

The GDP Numbers: The second quarter represents the largest drop in U.S. GDP in a single quarter in history.

The drop was more than three times as bad as the previous worst quarter in history, a 10% drop in the first quarter of 1958. The record second-quarter contraction follows a 5% drop in the first.

Investors will now shift their attention to the third and fourth quarters, when economists are expecting record growth due to the recovery from coronavirus pandemic shutdowns.

Economists are anticipating 30% GDP growth in the third quarter, which would nearly double the previous record of 16.7% growth in the first quarter of 1950.

Gus Faucher, chief economist at PNC Financial Services, said Wednesday that a political stalemate in Washington, D.C. over another stimulus package prior to the election threatens to derail the economic recovery.

“There are a lot of potential pitfalls out there,” Faucher said. “We are still dealing with a number of significant reductions because of the pandemic.”

Colas Says Markets Want More Stimulus: DataTrek Research co-founder Nicholas Colas said Wednesday that Wall Street is expecting a 25% to 30% GDP rebound in the third quarter, but the range of estimates is relatively large.

The New York Fed Nowcast is projecting just 14.1% GDP growth, while the Atlanta Fed GDPNow is projecting 32% growth.

Unfortunately, Colas said third-quarter estimates haven’t moved much higher since early September.

“The upshot here is that while the U.S. economy is certainly bouncing back from its COVID lows, it is also not accelerating much as we head into Q4,” Colas said.

“This is one reason why markets still want to see further fiscal stimulus, and based on both the regional Fed’s models and other data, this is certainly a reasonable perspective as we launch into Q4.”

Benzinga’s Take: The SPDR S&P 500 ETF Trust SPY clearly ran out of steam in the month of September, which could be a reflection in part of investors’ expectations that the economic recovery will run out of steam in the fourth quarter without more stimulus funding.

The Commerce Department will be reporting its initial estimate for third-quarter GDP growth Oct. 29, only five days before the U.S. presidential election.

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