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28 August 2020

US Economy Plunges

Ben Staniforth, Research Analyst, Redmayne Bentley

In a piece of historic news that was shrugged off by investors, as many seemingly concentrated on Jerome Powell’s Jackson Hole speech, US GDP figures for the second quarter 2020 period recorded a historic drop.

During the period, US GDP fell 31.7% as the world’s largest economy grappled with lockdown efforts and a significant rise in COVID-19 cases. While this was better than the 32.9% fall many had been expecting, it still marked the worst ever quarterly contraction in GDP on record in the US, more than triple the previous record. Large businesses, however, fared much better, with profits at S&P 500 firms falling on average 11.7%.

Small businesses have, however, suffered in many cases far worse than their larger counterparts, owning to smaller cash positions and thinner customer bases. In response, the US government began the roll out of the Paycheck Protection Program, aimed at providing struggling businesses with forgivable loans in order to keep employees on the payroll. Almost US$670bn has been provided to US businesses to date, however, few conditions were attached to such payments, meaning that boards were not bound to keep all of their employees after taking the money. This has drawn significant criticism from unions and employees alike, as US unemployment continues to skyrocket.

This has already started to impact President Trump’s re-election efforts, providing rival Joe Biden with ammunition to attack his administration’s response to COVID-19 and its subsequent impact on the economy, an area in which Trump has pressed hard to emphasise his own impact. With the pandemic hitting the US particularly hard, Biden is likely to benefit from this, with recent polling data indicating that he has taken a commanding initial lead, up 8.3% on Trump in the national polls. Important swing states have started to lean Biden’s way, with Florida, Michigan and Pennsylvania, which represent a combined 65 seats, all looking likely (at current levels) to swing Biden’s way. However, given President Trump’s prowess over the debate stage, it would be presumptuous to call an early victory for the Democrats. While the odds may be stacked against him, you would be na├»ve to fully write-off the President, even at such a large deficit.

 

Please note that investments and income arising from them can fall as well as rise in value. Please note that this communication is for information only.

US Economy Plunges
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