The United States economy contracted at the fastest rate recorded in the second quarter of 2020, according to data released Thursday morning by the Bureau of Labor Statistics.
Quarterly GDP statistics are typically calculated in terms of a seasonally adjusted annualized rate, and when it does, this is what it looks like: a sharp drop in positive growth in 2019 to a contraction of more than 30 percent in the most recent quarter .
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Economic Analysis Office
It is really bad. Not just the worst on record, but the worst on record by a wide margin.
But although the economic situation is really bad, a key indicator, the concept of annualized rate, leads experts to believe that there may be some hope for improvement. The idea here is that the Office of Economic Analysis typically wants to give us quarterly growth statistics that are comparable to annual growth statistics.
A year of 4 percent GDP growth would be really good. A real GDP growth of 3% would be good. A year of 2 percent GDP growth would probably be a bit of a disappointment. So, in a normal quarter, we’re trying to ask ourselves how the short-term trend compares to those kinds of benchmarks, and we essentially ask ourselves, “What if we had four quarters in a row that looked like this quarter?”
That’s a good way to do economic statistics, but it’s kind of a crazy question to ask about the second quarter of 2020, given that what happened back then was that a lot of companies closed and consumers pulled out of large market segments.
The concept of annualized rate then does not ask us “What if things stay closed for a whole year?” but “What if we keep closing things at the rate they closed in the second quarter?”
Statistically, the answer to that question turns out to be “economic activity would drop by about a third.” But this is not a question with any real-world implications. Since about April, the United States has allowed more economic activity, not less. Some of that economic activity is likely to have been reckless from a public health point of view and may need to be closed again in the future. But part of this reflects our better understanding of what kinds of things (outdoor transactions, things that are compatible with wearing masks) are safe, and part of this reflects our increased ability to conduct business online or appropriately distanced. .
When we look into the third quarter, we are seeing many industries that are reopening, either in full (dentist offices, car dealerships, appliance stores) or partially (restaurants), and we will probably see a number of historically surprising growth when expressed as an annualized rate. President Trump will boast doubly that it is the best economy in history, but, of course, it will not, since the second quarter was not the worst economy.
Instead, what we have, clearly, is a pretty bad economic situation: high unemployment, many retail companies on the brink or bankrupt, which has been significantly cushioned by generous government revenue supports for vulnerable people. In fact, thanks to the CARES Act, disposable personal income actually increased.
To appreciate how substantial the fiscal support was: real disposable personal income increased by 10% (annual rate was 44.9%) in the second quarter.
The economy collapsed but revenue increased due to stimulus controls and the user interface.
– Jason Furman (@jasonfurman) July 30, 2020
The big two questions in the future will be whether deteriorating public health conditions will force a new round of economic downturn and whether Republican intransigence in Congress will lead to big falls in household incomes as emergency benefits expire.
Until the pandemic is under control, it will be difficult to return to any type of economic normality.
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