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U.S. Gross Domestic Product (GDP) contracted by 32.9% in the second quarter, better than an expected decline of 35%. The decline was largely driven by weakness in consumer spending, which detracted 25% from aggregate GDP. A majority of the consumer spending decline occurred within the service sector as stay-at-home orders limited mobility.
Business investment was also weak, as businesses slashed spending budgets to preserve the bottom line. Business spending detracted over 5% from aggregate GDP.
Despite historically low interest rates, residential investment (housing) detracted from GDP for the first time in the past four quarters. However, ultra-low interest rates are positively affecting the housing market and it would not be surprising to see the housing sector return to growth in the next quarter.
Shifting to the positive contributors, net exports added nearly 1% to Q2 GDP. The positive contribution was due to a larger decline in imports than exports. The pandemic continued to disrupt global supply chains. As pandemic related restrictions ease, we expect supply chains to normalize and global trade to rebound.
Government spending also contributed nearly 1% to GDP in the quarter. Unprecedented government stimulus is flooding money into the economy to offset spending declines. This is a temporary solution and is not sustainable long-term.
As expected, the Q2 GDP decline was record-setting and is likely to mark the low point for GDP in this recession. Barring a widespread wave of lockdowns across the U.S., GDP growth will begin moving back towards its pre-COVID trend. We expect a strong Q3 economic rebound followed by more moderate growth thereafter.
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