PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

GDP Analysis: The Deep Hole

By at 30 July, 2020, 10:40 am

To sum things up, during the first two quarters of 2020, $2 trillion (in 2012 dollars) of real GDP was wiped out. Real GDP in the second quarter stood at basically the same level where GDP was at the start of 2015 – that is, five years ago. That’s the hole out of which we need to climb.

by Raymond J. Keating-

We all basically knew the numbers regarding second quarter GDP were going to be brutal, but it’s still shocking to see the estimate that second quarter real GDP plummeted by 32.9 percent, i.e., by a third, at an annualized rate. And that came after a decline of 5.0 percent in the first quarter.

Of course, these grim numbers reflect unique circumstances, given the COVID-19 pandemic and the government shutdowns meant to limit the spread of the disease. And these unique circumstances have resulted in the largest decline in real GDP in any quarter with quarterly data going back to 1947. The next largest decline was -10.0 percent, which occurred in the first quarter of 1958, by the way, when the Asian flu hit the U.S.

Looking ahead, we should expect to see a snapback in GDP data during the second half of this year. However, that snapback will be limited due to the spread and continuing uncertainties surrounding the pandemic, and will fall far short of getting us back to where we were before the pandemic hit. A full recovery promises to take much longer. That will especially be the case given how hard small businesses – the engines of growth and innovation – have been hit in this climate.

For now, following are key data points and trends from this latest GDP report that provide a picture of just how deep this economic hole is:

● As already mentioned, real GDP shrank by 5.0 percent in the first quarter 2020 and then by 32.9 percent in the second quarter. We only have quarterly GDP data going back to 1947, but this clearly is Great Depression territory.

● Given stay-at-home mandates, businesses shutting down, general concerns and fears, and unemployment skyrocketing, real personal consumption expenditures fell by 34.6 percent, after a decline of 6.9 percent in the first quarter.

● Real private gross investment went into freefall, dropping by 49.0 percent in the second quarter, after a decline of 9.0 percent in the first quarter. Looking further inside the investment numbers, real fixed nonresidential investment (i.e., business investment) fell by 27.0 in the second quarter, after falling by 6.7 in the first quarter. As for residential investment, after managing to increase by 19 percent in the first quarter, it declined by 38.7 percent in the second quarter.

● Trade evaporated. Real exports fell by 64.1 percent in the second quarter, which followed on a decline of 9.5 percent in the first quarter. Meanwhile, imports declined by 53.4 percent in the second quarter, after a drop of 15.0 percent in the first quarter.

● Only government consumption and investment experienced an increase in the second quarter, rising by 2.7 percent, with the federal government’s portion rising by a staggering 17.4 percent. By the way, this doesn’t reflect government income transfer programs.

Source: Federal Reserve Bank of St. Louis, FRED

To sum things up, during the first two quarters of 2020, $2 trillion (in 2012 dollars) of real GDP was wiped out. Real GDP in the second quarter stood at basically the same level where GDP was at the start of 2015 – that is, five years ago. That’s the hole out of which we need to climb.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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