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Chief economist update: A tiny bug takes down the largest economy

"Toto, I've a feeling we're not in Kansas anymore."
- Wizard of Oz

Data revealed in the latest US National Accounts gave meaning to declarations that we are living in unprecedented times.

Some would be concerned, but most would understand, reading about the US economy shrinking by 9.5% in the June quarter, given the coronavirus that's still doing its rounds around the world and ... assuming that that 9.5% is the number by which the US Bureau of Economic Analysis (BEA) normally and traditionally reports the economy's scorecard - annualising the quarter on quarter growth rate.

No it is not. The 9.5% contraction represents the quarter-on-quarter (which incidentally also corresponds to the year-on-year) performance of the US economy as at the end of June. The BEA's normal and traditional measure has America's economy sinking by a record minus 32.9%.

According to the BEA: "The second-quarter decrease in real GDP reflected decreases in consumer spending, exports, inventory investment, business investment, and housing investment that were partially offset by an increase in government spending. Imports, a subtraction in the calculation of GDP, decreased."

Read: were it not for government spending (CARES Act), and lesser imports (itself an indication of reduced domestic demand), the June quarter GDP figure would have been worse.

But increased government stimulus (as well as the Fed's) was not spent, but saved.

"Real disposable personal income (DPI)—personal income adjusted for taxes and inflation—increased 44.9 percent in the second quarter after increasing 2.6 percent in the first quarter. The increase in DPI was more than accounted for by an increase in personal current transfer receipts (notably, government social benefits). Personal saving as a percent of disposable personal income was 25.7 percent in the second quarter, compared with 9.5 percent in the first quarter," the BEA said.

No matter how we cut it, the US National Accounts was bad - the worst we've seen or we'll ever see in our lifetime.

Yet, Wall Street wasn't so perturbed - the Dow went down by just 0.9%; S&P 500 gave up 0.4%; the Russell 2000 by 0.4%; while the Nasdaq even closed with a 0.4% gain.

This is easy to explain. Apart from being "better" than consensus expectations for a 34.1% drop, the June quarter National Accounts is history. It painted yesterday's picture of the US economy when the coronavirus forced many businesses and factories to shutter and people to stay at home.

The gradual lifting of shutdowns and re-opening of businesses - allowing workers to return to work and consumers back in the shops - indicate that the US economy would rebound in the following quarter.

However, any improvement would be tempered by deferrals and renewed restrictions in an increasing number of US states that are experiencing rising infections.

A fact not lost on US Fed chair Jerome Powell.

At a press conference following the 28-29 July FOMC meeting, Powell declared: "We have seen some signs in recent weeks that the increase in virus cases and the renewed measures to control it are starting to weigh on economic activity."

"The path of the economy will depend significantly on the course of the virus."

Read our full COVID-19 news coverage and analysis here.

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