August 27, 2020

The first revulsion to second quarter GDP came in at -31.7% compared to a preliminary estimate of -32.9% and compared to a first quarter drop of 5.0%.  Basically, every category revised upwards by a very small amount.  But that is history and what we are really interested in is what happens next.  Given the monthly data available for May and June we currently expect a rebound in the third quarter of 28%.  The fiscal stimulus money is being spent and is providing a lift to the economy.  But once we get beyond these two quarters, the virus will determine the rate of spread of the virus.  We expect fourth quarter GDP to continue to climb by 7.0% as the economy continues to bounce back, but that growth rate could be tempered if the spread of the virus does not soon spread.  Keep in mind, too, that as we get towards the end of the year we should be getting close to having a vaccine which will give the economy a significant boost.  Lots of balls in the air right now.

Final sales, which is GDP excluding the change in business inventories fell 28.5% in the second quarter.

Final sales to domestic purchasers excludes both the change in inventories and trade fell 27.6% in the third quarter.

Consumption spending plunged by 34.1% in the second quarter after declining 6.9% in the first quarter.   Indeed, consumption spending accounted for 25.1% of the overall GDP decline in the second quarter.  Health care by itself accounted for 9.5% of the GDP decline as elective surgeries were halted and hospitals turned their attention to treating corona virus patients..  Food and services and accommodations accounted for another 5.5% or so.  Recreation services accounted for another 4.7%.  And transportation spending (think airfares) accounted for another 2.9%.  The drop in consumer spending was the culprit for most of the GDP decline in the second quarter.  Putting $1,200 checks in every taxpayer’s hands late in the second quarter will boost third quarter GDP by roughly the same amount as the decline in the second quarter.


Nonresidential investment fell 26.0% in the second quarter after declining 6.7% in the first quarter.  Not surprisingly spending on structures (factories, offices, etc.) fell by 33.4%.  Equipment spending declined by 35.9%.  Intellectual spending, however, fell by only 7.7% as business people turned to spending on software programs to help them cope with the dramatic decline in consumer spending..

Residential investment dropped by 37.9% in the second quarter.  But the drop was largely in March and April.  Sales of new homes have quickly rebounded as potential home buyers take advantage of record low 3.0% mortgage rates.  Look for residential investment to climb by about 24% in the third quarter.

The foreign sector as measured by the deficit for real net exports In the first  quarter narrowed by $27.1 billion from $788.0 billion to $760.9 billion.   Exports plunged by a huge 63.2% decline while imports fell by 54.0%. Growth around the world came tumbling down in the second quarter.  We expect both exports and imports to rise in the third quarter as the global economy begins to recover.

Federal government spending jumped 17.6% in the second quarter.  Defense spending climbed 4.2% but non-defense spending jumped by 40.1% as the government sent out those $1,200 refund checks.

Following the record-breaking 32.9% decline in second quarter GDP we expect GDP growth to rebound by 28% in the third quarter and an additional 7.0% in Q4.

Stephen Slifer


Charleston, SC