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Assistant Secretary Michael Faulkender Economy Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

The United States began 2020 with robust labor markets and solid economic growth.  In January and February, nonfarm payroll employment rose an average of 232,500 per month, the unemployment rate hovered near the five-decade low of 3.5 percent, and the labor force participation rate reached a six-year high of 63.4 percent.  Given monthly data for January and February, real GDP was on track to maintain a steady pace of growth.  However in March, SARS-CoV-2 began to emerge in the U.S. and spread quickly.  State and local governments implemented various restrictions to slow its spread and mitigate its impact.  Stay-at-home orders, closures of non-essential businesses, travel advisories, and other measures contributed to an historically sharp contraction, and the longest expansion on record ended in February 2020 at 128 months.

While shutdown measures helped “flatten the curve” of new cases of COVID-19 (the disease caused by SARS-CoV-2), they also took an enormous toll on economic activity.  Widespread business closures and declining aggregate demand led firms to shed a cumulative 22 million jobs in March and April.  The unemployment rate peaked at 14.7 percent – a post-WWII high – and the labor force participation rate fell to 60.2 percent, the lowest level since January 1973.  Real GDP decreased 5.0 percent at an annual rate in the first quarter, and the contraction sharpened to 32.9 percent in the second quarter, the most severe downturn on record.

The U.S. government responded quickly to the economic shock with unprecedentedly bold policy to support American households and small businesses during the pandemic.  Just two weeks after the first stay-at-home orders were issued, Congress had authorized three record-setting economic aid packages totaling roughly $2.7 trillion, and the Administration rapidly implemented the various measures – including Economic Impact Payments, expanded eligibility for unemployment insurance benefits, and the Paycheck Protection Program.

Due to the government’s robust response and the relaxation of stay-at-home orders, the economy started to recover in May after just two months of contraction.  In particular, the labor market began to recover faster than private forecasters had expected.  By June, 34 percent of the jobs lost had been recovered.  By this metric, this is the strongest recovery from a major recession since 1939, when the government started reporting payroll employment data.  Likewise, other monthly data – such as retail sales and home sales – have signaled that a decisive rebound started in May.

GDP Growth

Following a 5.0 percent annualized decline in the first quarter, real GDP dropped 32.9 percent at an annual rate in the second quarter as the effects of the pandemic and counteractive measures deepened.  All components of GDP – with the exceptions of government spending and net exports – saw unusually large, though temporary, drops in activity.  Private domestic final purchases – the sum of personal consumption, business fixed investment, and residential investment – fell 33.7 percent in the second quarter, after declining by 5.8 percent in the first quarter.

The social distancing measures implemented in mid-March, which included the temporary closure of many brick-and-mortar stores, remained in place through part of the second quarter and continued to weigh on purchases of durable goods and services.  Real consumer spending dropped 34.6 percent at an annual rate in the second quarter, after falling by 6.9 percent in the first quarter.  Although purchases of durable goods – a category that includes motor vehicles, household equipment and furnishings, among other items – declined 1.4 percent in the second quarter, the pace lessened from the 12.5 percent drop in the first quarter.  Purchases of nondurable goods – such as food and beverages purchased for off-premises consumption, gasoline and other energy goods, clothing, footwear, and other goods – declined by 15.9 percent in the second quarter, after growing by 7.1 percent in the first quarter.  But the brunt of stay-at-home orders and closure of many businesses significantly restricted household spending at service sector businesses, like eating at restaurants, traveling, and attending concerts, among others.  Spending on services plunged 43.5 percent in the second quarter, after declining by 9.8 percent in the first quarter.  Overall, real personal consumption expenditures subtracted 25.1 percentage points from second quarter growth, posing the largest drag of any GDP component, after subtracting 4.8 percentage points from growth in the first quarter.  That being said, the reopening of many businesses in mid-May boosted sales across a variety of spending categories, and that activity has been reflected in the recovery of monthly measures of consumption.  For example, retail sales have nearly recovered to their pre-COVID levels, and were even up 1 percent over the year through June.

As of the second quarter, total business fixed investment has constrained GDP growth for three consecutive quarters.  Drag in previous quarters had multiple causes: slowing international growth, policy uncertainty, and persistently low oil prices, as well as company-specific difficulties (such as at Boeing and GM).  In the second quarter, business investment declined 27.0 percent at an annual rate, mainly reflecting sharp pull-backs in spending on equipment and structures, and following a 6.7 percent retreat in the first quarter.  Equipment investment plunged 37.7 percent as most categories – other than information processing equipment – contracted.  Spending on structures dropped 34.9 percent; disinvestment was broad based but especially notable in mining, which fell 77.8 percent as historically low oil prices made wells unprofitable.  Meanwhile, expenditures on intellectual property products (IPP) declined 7.2 percent in the second quarter, after contributing to GDP growth in every quarter since early 2015; the loss was heavily concentrated in research and development as well as business spending on entertainment, literary, and artistic originals.  Overall, business fixed investment subtracted 3.6 percentage points from real GDP growth in the second quarter, following a 0.9 percentage point subtraction in the first quarter.

The change in private inventories, a volatile component, subtracted 4.0 percentage points from economic growth in the second quarter of 2020, after subtracting 1.3 percentage points in the first quarter.  The pandemic reduced production at many factories and forced businesses to draw down inventories.

From the third quarter of 2019 to the first quarter of 2020, residential investment was a bright spot in the economy, but the pandemic hindered construction in March and early in the second quarter, which caused a sharp decline in this component of GDP for the second quarter.  After surging by 19.0 percent in the first quarter, residential investment dropped 38.7 percent in the second quarter.  Residential investment added 0.7 percentage point to GDP in the first quarter, its largest contribution to growth since the second quarter of 2004, but it subtracted 1.8 percentage points from growth in the second quarter, as the effects of the COVID-19 pandemic initially outweighed the support of record-low mortgage rates.  Nonetheless, those effects have been temporary, with evidence that the housing sector has been recovering since May.  Total housing starts, as well as total permits, have grown strongly since April: starts have jumped 27.0 percent in the last two months and permits – a leading indicator for starts – were up 18.0 percent.  Demand for homes have rebounded as well.  Existing home sales, which account for 90 percent of all home sales, grew 20.1 percent in June, moving back towards the 13-year high February, but still 11.3 percent lower over the past year.  Furthermore, a robust pending home sales reading in June – an indicator which leads existing home sales by 1 to 2 months – portends the recovery of home sales activity should persist in the near-term.  New single-family home sales advanced 13.8 percent in June, after a 19.4 percent surge in May; sales of new homes exceeded even January’s 12-year high and registered strong growth of 6.9 percent over the past year.  In July, the National Association of Home Builder’s home builder confidence index jumped 14 points to 72, continuing to convey a positive view about housing market conditions.  Housing affordability has been supported by slowing home price growth rates and record-low mortgage rates.  Average rates for 30-year mortgages are now nearly 2 percentage points below levels in mid-November 2018. 

Government spending advanced 2.7 percent at an annual rate in the second quarter, following growth of 1.3 percent in the previous quarter.  Federal spending surged 17.4 percent in the second quarter, reflecting implementation of the Coronavirus Aid, Relief, and Economic Security (CARES) Act – which was passed at the end of March, just two weeks after the first stay-at-home orders were issued.  Meanwhile, state and local governments curbed their spending by 5.6 percent in the second quarter.  Even so, total government spending made the largest contribution to second quarter GDP growth, adding 0.8 percentage point.  For its part, the federal government added 1.2 percentage points.

The net export deficit declined $7.3 billion during the second quarter to $780.7 billion, as both exports and imports plunged.  Total exports of goods and services dropped by 64.1 percent, while imports fell by 53.4 percent.  The narrowing of the trade deficit added 0.7 percentage point to second quarter GDP growth, after contributing 1.1 percentage points to economic growth in the first quarter.

U.S. Government Policy Response

The U.S. government responded quickly with unprecedentedly bold fiscal and monetary actions to support American households and small businesses during the pandemic.  This degree of coordination has been significantly greater in scale, and faster in implementation, than what was deployed following the 2008 financial crisis.

On the fiscal side, Congress has authorized a record-setting economic aid package of roughly $2.7 trillion to date.  The Federal Government has aided Americans through Economic Impact Payments and has helped the unemployed by adding a temporary weekly federal benefit to normal state unemployment compensation and expanding eligibility for benefits to the self-employed and gig workers.  The Administration also postponed tax payments and delayed loan payments for borrowers of federally-backed student loans to boost disposable incomes and help American households to weather the pandemic.

In addition, Treasury and the Small Business Administration launched the Paycheck Protection Program (PPP) less than a week after its authorization at the end of March.  The Administration worked directly with private lenders and used their infrastructure to hasten how quickly businesses could receive funds.  In less than two weeks, the PPP had exhausted its initial funding: it had processed nearly 1.7 million loans worth $342 billion.  After a second appropriation, the PPP has provided nearly 5 million loans to date, worth over roughly $520 billion.  This program alone has supported over 80 percent of eligible small business employment – approximately 51 million jobs – in all 50 states.

On the monetary side, the Federal Reserve swiftly cut its interest rate target to zero and implemented large-scale purchases of Treasury securities and agency mortgage-backed securities.  Importantly, the Federal Reserve assuaged market worries by using its Section 13(3) authority to establish numerous emergency lending facilities.  Through these facilities, it can leverage capital provided by Treasury, which has committed $215 billion of capital.  Treasury can commit up to $454 billion as conditions require.  Although the Federal Reserve had used only 3.2 percent of its stated lending capacity by the end of July, the existence of these facilities have unlocked financial markets and mitigated the risk of the public health crisis from becoming a financial crisis.

Labor Markets and Wages

Although the economy’s sudden downturn resulted in a loss of nearly 22 million jobs over March and April, payroll job growth resumed in May, much earlier than expected.  In May and June, employers added a total of 7.5 million payroll jobs, recovering 34 percent of what was lost in March and April.  In sharp contrast after the 2008-09 recession (the “Great Recession”), the U.S. economy did not start adding payroll jobs until early 2010, some seven months after the recession officially ended.

Meanwhile, the headline unemployment rate – which stood at a half-century low of 3.5 percent in February 2020 -- rose rapidly and reached a post-World War II high of 14.7 percent in April but has since declined to 11.1 percent as of June.  Significantly, the vast majority of those unemployed since the onset of the pandemic identify themselves as “temporarily laid off.”  Again, the latest labor market recovery has significantly outpaced the last recession.  After the end of the Great Recession, the unemployment rate continued to rise and did not peak until four months after the trough.

Likewise, the headline labor force participation rate (LFPR) – as well as prime-age (ages 25-54) LFPR –reached multi-year highs earlier in the year, before declining to multi-year lows in April.  Yet as of June, LFPRs have bounced back.  Specifically, the headline LFPR had rebounded to 61.5 percent, roughly 2 percentage points below the six-year high seen in February, and the prime-age LFPR had recovered to 81.5 percent, about 1.5 percentage points below January’s eleven-year high.  The employment report for July 2020 will be released this Friday, August 7.

As of June, nominal average hourly earnings for production and nonsupervisory workers have grown above 3 percent for 23 consecutive months, a record not seen in thirteen years.  However, recent readings may have been unduly elevated as the furloughing of lower wage workers has boosted the average.  The rapid return of some of these workers has pulled the average wage a bit lower: in June, nominal average hourly earnings for production and nonsupervisory workers were up by 5.4 percent over the year through June 2020, slowing from 6.6 percent in May, and 7.7 percent in April at the depth of the recession.  In real terms, earnings growth also accelerated as intermittent deflationary forces emerged early in the pandemic.  Real average hourly earnings rose 0.9 percent over the year through December 2019, and growth accelerated 4.8 percent over the 12 months through June 2020.  Wages and salaries for private industry workers, as measured by the Employment Cost Index, advanced 3.0 percent over the four quarters ending in December 2019, then decelerated slightly to a 2.9 percent pace over the four quarters ending in June 2020.


Partly due to the pandemic and partly due to a global oil glut, deflationary pressures emerged in March.  But these pressures have started to reverse.  The Consumer Price Index (CPI) for all items advanced 0.6 percent in June, as daily oil prices trended higher and demand for food and drink at restaurants and bars increased.  Over the 12 month through June, inflation rose by 0.6 percent in June, picking up from the nearly flat year-over-year reading through May, though still much slower than the 1.6 percent increase over the year through June 2019.  Despite recent gains, energy prices were still 12.6 percent lower over the year through June, an even sharper fall than the 3.4 percent decline a year earlier.  Food price growth has accelerated noticeably, however, with prices specifically for food rising 4.5 percent over the year through June, more than double the 1.9 percent pace over the 12 months through June 2019.  Although relatively more stable than headline inflation, core CPI growth has also reversed from deflation earlier in the pandemic to inflation.  From February to May, core CPI fell 0.6 percent but increased 0.2 percent in June.  Nonetheless, year-over-year growth slowed to 1.2 percent over the year through June, compared with the 2.1 percent, year-earlier increase.

Other price measures have shown more consistently the economy’s restrained inflationary pressures for some time.  The headline Personal Consumption Expenditures (PCE) Price Index (the preferred measure for the FOMC’s 2 percent inflation target) has held below the target since November 2018.  The 12-month headline PCE inflation rate slowed to 0.8 percent in June 2020, only one-half of the 1.5 percent pace over the year through June 2019.  Core PCE inflation was 0.9 percent over the year through June 2020, slowing from the 1.7 percent, year-earlier rate.


Despite the severe downturn due to the pandemic, there are many signs that economic activity resumed more quickly, and with more strength, than many predicted.  Household purchases of goods now exceeds pre-COVID spending (though expenditures on services still lags); indices of growth in the manufacturing and services sectors are again signaling expansion; the housing sector’s recovery is on solid footing; and deflationary pressures have subsided.  In early July, the Blue Chip consensus of private forecasters predicted that real GDP would jump by 17.7 percent at an annual rate in the third quarter, and actual growth is expected to exceed estimates of potential GDP growth for the next several quarters.  Notably if the recession that began in March is determined to have ended in April, it would be the shortest in U.S. history – a testament to the economy’s resilience.

Despite the burgeoning recovery, there is still significant uncertainty about how quickly the economy can return to previous levels of activity.  Some sectors – such as air travel, entertainment, restaurants and bars, and hotels and accommodations – have been more severely affected by the pandemic than other sectors and are lagging the overall recovery.  Moreover, the resurgence of COVID-19 cases has encouraged some states and localities to pause or backtrack re-openings, which could soften a rebound.

Another round of federal fiscal aid can bolster the economy by reinforcing household balance sheets, mitigating the impact of pandemic-related unemployment, and providing small businesses the necessary liquidity to weather this challenging time.  However, such measures should be targeted to promote growth, reduce disincentives to work, and mitigate the risk of creating future imbalances.  In addition, these measures should be temporary because the pandemic is temporary.  New therapeutic treatments can help ease the symptoms of COVID-19, and rapid progress toward a vaccine means the economy ultimately will return to the strength it exhibited before the virus.