2 Economic Headwinds Emerged In July

William Arsn

The U.S. economy just experienced its worst economic quarter in reported history, but experts say the upside is that it performed about as badly as was predicted by JLL.

Real GDP declined 32.9{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} in the second quarter of 2020 on an annualized basis, which is the largest drop since the quarterly GDP time series began in 1947. Additionally, GDP in the second quarter contracted 10.6{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} peak-to-trough, the third-largest contraction since the Great Depression and the worst performance since the demobilization effort at the end of World War II.

This is the second consecutive quarter in which GDP declined, wiping out five years of economic growth and bringing the size of the economy back to down to 2014-2015 levels.

However, JLL noted that the severe drop in GDP aligned with expectations. Much of the downturn was caused by a drop in personal consumption of services, as businesses closed down temporarily, private investment contracted significantly and net exports fell, while government expenditures increased slightly.

Even with the large overall drop in the second quarter, JLL found that economic data began to improve as the second quarter progressed. Job growth and retail sales turned positive and May and continued to increase in June, while weekly unemployment claims — although still at historic highs — have now been declining for months. But the uptick didn’t last: by July, unemployment claims were once again rising, with temporary furloughs turning into layoffs, and mobility indexes and other real-time economic indicators began to show signs of trouble.

Looking forward, JLL said that two headwinds emerged in July that may alter the economy’s future. First, as COVID-19 testing began to increase across the country, state and local governments once again restricted activity, causing businesses to close and consumers to refrain from businesses for fear of catching the virus. Second, the CARES act recently expired, and JLL said that the absence of federal stimulus money will further harm the economy.

For CRE, the impacts of the recession will be large. Although the asking rents across markets declined somewhat modestly compared to the large contraction to GDP in the second quarter, during other recessions, asking rent usually continues to increase when GDP begins to contract and does not decrease until 2-3 quarters into a recession.

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