HomeA Detailed Look of the U.S. Economic Performance in Q2 2020

A Detailed Look of the U.S. Economic Performance in Q2 2020

4 August 2020 By Mircea Vasiu

Besides the FOMC Meeting from last Wednesday, the Gross Domestic Product (GDP) release was one of the most important pieces of economic data last week. While the financial media’s headlines focused on the -32.9% annualized number, in reality, the U.S. economic contraction was way lower than that.  

The -9.5% contraction for the second quarter of the year fully reveals the economic struggles. The disinflationary pressures created by the coronavirus crisis led to the Fed, suggesting that it will leave the interest rates and the overall monetary policy in an accommodative stance for the foreseeable future.

Q2 2020 U.S. Economic Picture

From the start, the high savings rate for the quarter strikes the eye. The personal savings rate almost tripled when compared with the first quarter, reaching well into double-digit growth – it came out at 25.7% of disposable income when compared with 9.5% in the first quarter.

Private consumption fell by more than a third on an annualized rate, in line with the rise in the personal savings rate. Moreover, exports and residential investments declined, while government spending on non-defense items rose.

As one-third of the new quarter is already behind us, the market participant will turn their attention to July’s data. We already saw a better than expected ISM PMI yesterday, although the employment component remains weak. The employment component is closely watched during the NFP week, because, together with the ADP number, it offers a clue about what the NFP may look like. So far, it does not paint a positive picture.

The Fed made it clear last week – the U.S. economic performance depends on how the coronavirus pandemic is handled. The longer the uncertainty, the stronger the impact with longer-lasting effects on the economy.

What strikes the eye is that the financial markets still consider the European economies to get out in a better shape than the U.S. one from the coronavirus crisis. However, if we look at the Eurozone GDP numbers for the same quarter, the average 12.1% is far worse than the U.S. GDP. So why investors expect better performance from the Eurozone when the numbers point to a totally opposite picture?

One explanation could be that this was the expectation so far, and the data from last Thursday and Friday took the market by surprise. It explains the sharp reversal in the EURUSD pair, and also the greenback’s bounce.

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