The U.S. economy suffered its sharpest downturn since at leastthe 1940s in the second quarter, highlighting how the pandemic has ravaged businesses across thecountry and left millions of Americans out of work.

Gross domestic product (GDP) shrank 9.5 percent in the secondquarter from the first, a drop that equals an annualized pace of 32.9percent, the Commerce Department's initial estimate showed onThursday. That's the steepest annualized decline in quarterlyrecords dating back to 1947 and compares with analyst estimates fora 34.5 percent contraction. Personal spending, which makes up abouttwo-thirds of GDP, slumped by an annualized 34.6 percent, also themost on record.

The figures lay bare the extent of the economic devastation thatresulted from the government-ordered shutdowns and stay-at-homeorders designed to slow the spread of the novel coronavirus, whichabruptly brought a halt to the long-running expansion. Whileemployment, spending, and production have improved since reopeningspicked up in May and massive federal stimulus reached Americans, arecent surge in infections has tempered the pace of therecovery.

That surge—the result of America's failure to contain thevirus—indicates that the U.S. economy is likely to recover moreslowly than places that have done a better job, such as theEurozone. And the longer the pandemic lasts without a vaccine, thelonger economic output will remain below pre-crisis levels, leavingpermanent scars on many businesses and workers.

"We already know that activity rebounded strongly in May andJune, setting the stage for a strong rise in GDP in the thirdquarter," Andrew Hunter, senior U.S. economist at CapitalEconomics, said in a note. "Nevertheless, with the more recentresurgence in virus cases starting to weigh on the economy in July,a continued 'V-shaped' recovery is unlikely."

A separate report Thursday showed the number of Americans filingfor unemployment benefitsincreased for a second straight week. Initial claims throughregular state programs rose to 1.43 million in the week ended July25, up 12,000 from the prior week, the Labor Department said. Therewere 17 million Americans filing for ongoing benefits through thoseprograms in the period ended July 18, up 867,000 from the priorweek.

U.S. stocks fell the most in a week after the data releases, andyields on 10-year Treasuries declined.

While the economic restart has helped put 7.5 million Americansback to work in May and June combined, payrolls are down more than14.5 million from their pre-pandemic peak. The swift deteriorationin the economy and job market explain why the Federal Reserve iskeeping its benchmark rate pinned near zero and why it rolled out several emergency lending programsgeared toward fostering liquid trading conditions in financialmarkets.

"We have seen some signs in recent weeks that the increase invirus cases, and the renewed measures to control it, are startingto weigh on economic activity," Fed Chairman Jerome Powell said ata news conference Wednesday after the central bank's two-day policymeeting. "On balance, it looks like the data are pointing to aslowing in the pace of the recovery," though it was too soon to sayhow large—or sustained—this period would be, he said.

With the election only three months away, American voters willhave to decide whether to re-elect President Donald Trump to asecond term against a backdrop of the virus-induced recession andhis response to the health crisis.

Broad-Based Economic Decline

The second-quarter contraction was broad-based, the GDP releaseshowed. Business investment in structures, equipment, andintellectual property slumped at an annualized 27 percent pace, thesteepest slide since 1952, while residential investment dropped ata 38.7 percent rate, the most since 1980. More recently, figureshave shown a pickup in home sales as Americans take advantage ofrecord-low mortgage rates.

Meanwhile, the pandemic's toll on household spending forservices was breathtaking: A 43.5 percent annualized slide duringthe quarter, subtracting nearly 23 percentage points from GDP.Meanwhile, outlays for goods took away 2.1 percentage points.

After passage in late March of the CARES Act, the largest U.S. stimulus package inmodern history, government spending and investment increased anannualized 2.7 percent as non-defense outlays surged at a 39.7percent pace, the most since the Vietnam War in 1967. However,state and local spending declined at a 5.6 percent pace amidplummeting tax revenues.

The report also showed inventories subtracted nearly 4percentage points from GDP, while trade added 0.7 percentagepoint.

The quarterly profile of the economy—as shown by the GDPreport—paints a much different picture than monthly data do. Asshutdowns gradually lifted and states began to reopen, economicactivity stirred back to life in May and June, just not to thelevels seen before the pandemic.

Millions of people headed back to work, and Americans venturedout of their homes to spend again at newly reopened stores andrestaurants. Bolstered by relief payments and unemploymentbenefits, retail sales rebounded to near pre-pandemic levels andconsumer spending surged by the most on record in May—though stillcame in short of the February level.

The rebound in activity will largely be captured in thethird-quarter figures, which won't be released until Oct. 29, justdays before Election Day. But the surge in virus cases has led theeconomic recovery to stall for several weeks, as consumers holdback on spending and traveling amid continued layoffs, according tothe Bloomberg Economics recovery tracker.

Crucial lifelines in the pandemic, like the extra $600 in weeklyunemployment benefits, are expiring at a time when the economicrecovery is showing signs of teetering. Lawmakers are currentlydebating another stimulus package to support businesses and theunemployed, but the timing of the bill is unclear. Support fromCongress has buoyed the economy in recent months, and furtheraction will be crucial in determining the path of the recovery.

This is the first estimate of three for the second-quarterfigures, and the figure will likely be revised over the next twomonths as the Bureau of Economic Analysis receives furtherdata.

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