GDP Plunged At A 32.9% Rate: Here’s Why It Matters

The Commerce Department's initial estimate of U.S. gross domestic product (GDP) in the second quarter was, in a word, historic. The value of all goods and services purchased last quarter plunged at a 32.9% annual rate. This followed a 5% contraction in the first quarter of 2020.

They say a picture is worth a thousand words:

The BEA offered the following assessment of this decline in GDP:

“The decline in second quarter GDP reflected the response to COVID-19, as ‘stay-at-home’ orders issued in March and April were partially lifted in some areas of the country in May and June, and government pandemic assistance payments were distributed to households and businesses. This led to rapid shifts in activity, as businesses and schools continued remote work and consumers and businesses canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the second quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.”

The 32.9% decline in GDP has no historic precedence in the U.S. As the WSJ noted, its the steepest quarterly decline in records dating back to 1947 and more than three times the 10% decline in the first quarter of 1958. The GDP contraction in 1921 was not this steep. To put the current numbers into perspective, one definition of a depression is a decline in GDP of 10%.

But does it matter?

At one level, the 32.9% decline doesn't change a thing. It was obvious that the economy contracted at unprecedented scale as schools, businesses and life as we knew it shuttered to combat Covid-19. Economists surveyed by Dow Jones predicted an even greater contraction of 34.7%. The numbers are jarring, to be sure, but not surprising.

Yet the 32.9% decline in GDP, along with other information released by the BEA is, in my opinion, important as it may affect ongoing negotiations in Washington over another round of Covid-19 relief.

The $600 federal unemployment relief expires tomorrow, and negotiations over an extension of this benefit in some amount have yet to produce an agreement. Senate Republicans have proposed a $200 weekly benefit followed by a proposal to give those laid off 70% of their prior income in combined state and federal assistance. Democrats want to continue the $600 weekly payment into 2021. No agreement is in sight.

As difficult as the second quarter was, we aren't out of the woods. While the country began to open up in May and June, an increase in Covid-19 cases have caused many locations to reimpose stay-at-home orders or otherwise curtail economic activity. Many school districts have opted for online learning at the start of the school year. The decision to close schools, while understandable, may have ripple effects throughout the economy as parents struggle to balance work and childcare. To put these challenges into some perspective, in the week ending July 25, 1.43 million people filed for initial unemployment benefits.

While all of this may suggest continuing the $600 weekly federal unemployment assistance is critical, not all of the numbers released by the BEA were so grim. For example, disposable personal income (DPI) increased by 42.1% in the second quarter, compared to 3.9% in the first quarter. Real DPI jumped by 44.9%. As the BEA noted, this increase in DPI "was more than accounted for by an increase in personal current transfer receipts (notably, government social benefits) and a decrease in personal current taxes. . . ."

At the same time, the personal savings rate as a percentage of DPI was 25.7%. It was 9.5% in the first quarter. These numbers suggest that the CARES Act and other Covid-19 relief worked as intended, and then some. As our economy continues to struggle, however, DPI and the personal savings rate could decline precipitously without additional federal relief.

And the $3 trillion dollar question still remains. Just how much assistance should the federal government provide? A recent study released by JPMorgan Chase found that while aggregate spending by those employed was down by 10% during the initial months of the pandemic, spending by unemployment benefit recipients increased by 10%. The study concluded that this likely resulted from the $600 federal weekly unemployment benefit.

If the goal of federal assistance is to bring spending by the unemployed in line with spending by those employed, the study estimates that a $150 weekly benefit would suffice. If the goal is to bring spending in line with pre-pandemic levels, the weekly benefit would need to rise to about $350 a week. In either case, it falls well below the expiring $600 weekly benefit.

Here are additional resources to follow this developing story:
• $600 Federal Unemployment Benefit At Risk: Here’s Where The Negotiations Stand
• Finally: $1,200 Second Stimulus Check And Reduced Unemployment Benefits Proposed In HEALS Act Package
• Why You Won't See A Payroll Tax Cut In Second Stimulus Round
• Second Stimulus: The Latest On Government Relief
• Second Stimulus Check Proposals: How Much Could You Get With Each?

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