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The U.S. economy contracted by a record 32.9% in Q2 (annualized), as the damage caused by the coronavirus pandemic continues to rage. Anthony Okolie speaks with James Marple, Senior Economist, TD Bank, about the historic plunge in GDP and what it signals for the economy.
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- The US suffered its worst period ever in the second quarter with GDP falling nearly 33% on an annualized basis. James, this was a historic contraction for the quarter. Just how bad was this? Give us some context.
- Sure. Well, as you mentioned, as far as the BEA, the Bureau of Economic Analysis has been recording quarterly GDP, this is by far the worst contraction we've ever seen. It's far worse than anything we saw in the global financial crisis or the 2008 so-called great recession.
It was a very interesting and unique report in the sense that typically in recessions you get goods activity declining most dramatically, and that relates to people having trouble accessing credit. So they really cut back on spending on durable goods items. You know, you typically see housing and auto sales and then business investment on major things really leading the economic contraction. And while all of those things pull back, the contraction was really led by services spending, which is the majority of the economy, but it's typically one of the least variable parts of the economy.
You had almost a third of the pullback in health care, which is fascinating, I mean, given this is a health crisis. But you don't realize that people weren't going to the dentist. People weren't going and making any kind of routine visits. And that resulted in-- and that's a growing and big share of the economy-- that resulted in a big contraction in economic activity.
- And when we talk about that nearly 33% drop in second quarter US GDP, as I mentioned, this is an annualized number. But in non-annualized terms, the economy shrank 9.5%. Can you help explain the mechanics of the difference in those data points?
- Yeah, I mean, I think it's an important point because some people will watch the news and say, wow, the economy is one third smaller than it was a quarter ago, and that's not really true. We tend to annualize growth numbers, and that makes sense in a more normal environment. We annualize it just because it allows us to say, if this was to continue for the next four quarters, what would the year look like?
But this is such a unique experience. No one expects the economy to shrink by another 33% next quarter-- or, sorry, 9, 9 and 1/2%. So I think in this sense-- in this case, it makes sense to talk about the non-annualized number to say really economic activity in the quarter, relative to the previous quarter, shrank by about 10%, 9 and 1/2.
And maybe another metric that's useful is if you include the decline in the first quarter, the economy's a little over 10% smaller today or in the second quarter relative to where it was entirely pre-COVID in the fourth quarter of 2019. So that's the hole we have to dig out of, about a 10% decline in economic activity, not quite 33%. But even so, any way you look at it, non-annualized or annualized, a 10% decline in a single quarter is by far the worst we've ever seen, again, since we've been recording the data in the 1960s.
- Yeah, it's certainly a very big number. In your report, you also talk about the only component that showed growth last quarter was government spending in the second quarter. Now, given that, how crucial is it for the government-- the US government to continue to pour money into the economy?
- Yeah, well, there's two elements there. One, a lot of that government spending was the federal government, and state and local governments actually contracted. And state and local governments are where a lot of the employment is, and they also fund school boards and all of that.
The federal government spending, part of that was just in terms of the PPP program and getting that program up and running. That showed up in terms of increased government spending. And of course, that all happened in Q2. It's going to pull back probably in Q3.
That state and local government component, though, is really important because that's likely to decline again in the next quarter if there isn't some increased federal support for state and local governments because they cannot run operating deficits. They have to close budget gaps by cutting spending when their revenues fall. And of course, their revenues have been hit hard by the crisis.
The other thing, though, in government spending-- you don't see it actually, in terms of the G in GDP, but it was a massive increase to transfers, which held up real disposable income. In fact, disposable income in the quarter, despite the rise in unemployment, rose 10% non-annualized. So that's a huge bridge to the economy that has allowed activity to rebound as it has through the months of May and June because people had incomes. They had those checks coming in even if they were unemployed.
And that is, I think, what we have to watch for now with the negotiations between Republicans and Democrats in Washington. Do they have further income supports to maintain that spending while the unemployment rate is still above 10%? And again, just second, do they give that support to state and local governments?
- Now, you also say in your latest report that international trade fell off a cliff. Exports are down 64%. Imports are down more than 53%. Given the economic activity that we're seeing in other regions like Germany, for example, which had its biggest drop in second quarter GDP since 1970, what are the implications for trade going forward?
- Yeah, well, certainly in the second quarter, we saw sort of the whole world increasingly in the same kind of boat, especially advanced economies all contracting at the same time as the virus spread and as lockdowns emerged. What we're starting to see now is some divergence even in the face of economic recovery, and it's dependent on health outcomes. I mean, Europe has, in the recent Purchasing Managers' Index data, actually bounced back faster into expansionary territory in both its manufacturing and non-manufacturing sectors. I mean, that arguably bodes well for the recovery outside of the United States. But again, we've seen cases start to pop up here and there, and it really will depend on maintaining the positive health outcomes to maintaining that growth.
But, I mean, borders remain shut. We're not going to see that probably end any time soon. A lot of services exports will continue to be impaired. And I think global trade will continue to be impaired really until we get a vaccine. And then after that, we have to deal with sort of all the other ramifications of China, US, and all the difficulties there that will probably continue well past the crisis.
- In the few minutes we have left, I want to talk a little bit about the US labor market. In addition to the Q2 GDP numbers, we've got some jobs numbers as well. US initial jobless claims rose 1.4 million last week-- again, the second straight weekly rise. What's your take on that?
- Yeah, well, that's a really important number to watch because we have seen the job numbers actually outperform. I mean, jobs came back-- over 4 million jobs created in June. And now we're really looking to July, to the second half of this year, as evidence of rising case counts come up. Is that going to be maintained? And it's looking like, in a lot of high frequency data-- most especially in this jobless claims data-- that the job recovery has stalled.
So at a minimum, we're likely to see a slowdown in the rate of recovery. You know, keep in mind, we've only recovered about 40% of the jobs that were lost during the crisis. So slowing that down means, you know, it's going to take that much longer to fill that hole. But certainly the increase in claims reflects what we're seeing in terms of other high frequency data for a slowdown in activity as we've seen cases rise and people really take more precautions, even if not mandated by governments, but just pull back on spending, stay away from restaurants just because they're worried about catching the virus.
- James, thank you very much for your insights.
- You're welcome.
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- The US suffered its worst period ever in the second quarter with GDP falling nearly 33% on an annualized basis. James, this was a historic contraction for the quarter. Just how bad was this? Give us some context.
- Sure. Well, as you mentioned, as far as the BEA, the Bureau of Economic Analysis has been recording quarterly GDP, this is by far the worst contraction we've ever seen. It's far worse than anything we saw in the global financial crisis or the 2008 so-called great recession.
It was a very interesting and unique report in the sense that typically in recessions you get goods activity declining most dramatically, and that relates to people having trouble accessing credit. So they really cut back on spending on durable goods items. You know, you typically see housing and auto sales and then business investment on major things really leading the economic contraction. And while all of those things pull back, the contraction was really led by services spending, which is the majority of the economy, but it's typically one of the least variable parts of the economy.
You had almost a third of the pullback in health care, which is fascinating, I mean, given this is a health crisis. But you don't realize that people weren't going to the dentist. People weren't going and making any kind of routine visits. And that resulted in-- and that's a growing and big share of the economy-- that resulted in a big contraction in economic activity.
- And when we talk about that nearly 33% drop in second quarter US GDP, as I mentioned, this is an annualized number. But in non-annualized terms, the economy shrank 9.5%. Can you help explain the mechanics of the difference in those data points?
- Yeah, I mean, I think it's an important point because some people will watch the news and say, wow, the economy is one third smaller than it was a quarter ago, and that's not really true. We tend to annualize growth numbers, and that makes sense in a more normal environment. We annualize it just because it allows us to say, if this was to continue for the next four quarters, what would the year look like?
But this is such a unique experience. No one expects the economy to shrink by another 33% next quarter-- or, sorry, 9, 9 and 1/2%. So I think in this sense-- in this case, it makes sense to talk about the non-annualized number to say really economic activity in the quarter, relative to the previous quarter, shrank by about 10%, 9 and 1/2.
And maybe another metric that's useful is if you include the decline in the first quarter, the economy's a little over 10% smaller today or in the second quarter relative to where it was entirely pre-COVID in the fourth quarter of 2019. So that's the hole we have to dig out of, about a 10% decline in economic activity, not quite 33%. But even so, any way you look at it, non-annualized or annualized, a 10% decline in a single quarter is by far the worst we've ever seen, again, since we've been recording the data in the 1960s.
- Yeah, it's certainly a very big number. In your report, you also talk about the only component that showed growth last quarter was government spending in the second quarter. Now, given that, how crucial is it for the government-- the US government to continue to pour money into the economy?
- Yeah, well, there's two elements there. One, a lot of that government spending was the federal government, and state and local governments actually contracted. And state and local governments are where a lot of the employment is, and they also fund school boards and all of that.
The federal government spending, part of that was just in terms of the PPP program and getting that program up and running. That showed up in terms of increased government spending. And of course, that all happened in Q2. It's going to pull back probably in Q3.
That state and local government component, though, is really important because that's likely to decline again in the next quarter if there isn't some increased federal support for state and local governments because they cannot run operating deficits. They have to close budget gaps by cutting spending when their revenues fall. And of course, their revenues have been hit hard by the crisis.
The other thing, though, in government spending-- you don't see it actually, in terms of the G in GDP, but it was a massive increase to transfers, which held up real disposable income. In fact, disposable income in the quarter, despite the rise in unemployment, rose 10% non-annualized. So that's a huge bridge to the economy that has allowed activity to rebound as it has through the months of May and June because people had incomes. They had those checks coming in even if they were unemployed.
And that is, I think, what we have to watch for now with the negotiations between Republicans and Democrats in Washington. Do they have further income supports to maintain that spending while the unemployment rate is still above 10%? And again, just second, do they give that support to state and local governments?
- Now, you also say in your latest report that international trade fell off a cliff. Exports are down 64%. Imports are down more than 53%. Given the economic activity that we're seeing in other regions like Germany, for example, which had its biggest drop in second quarter GDP since 1970, what are the implications for trade going forward?
- Yeah, well, certainly in the second quarter, we saw sort of the whole world increasingly in the same kind of boat, especially advanced economies all contracting at the same time as the virus spread and as lockdowns emerged. What we're starting to see now is some divergence even in the face of economic recovery, and it's dependent on health outcomes. I mean, Europe has, in the recent Purchasing Managers' Index data, actually bounced back faster into expansionary territory in both its manufacturing and non-manufacturing sectors. I mean, that arguably bodes well for the recovery outside of the United States. But again, we've seen cases start to pop up here and there, and it really will depend on maintaining the positive health outcomes to maintaining that growth.
But, I mean, borders remain shut. We're not going to see that probably end any time soon. A lot of services exports will continue to be impaired. And I think global trade will continue to be impaired really until we get a vaccine. And then after that, we have to deal with sort of all the other ramifications of China, US, and all the difficulties there that will probably continue well past the crisis.
- In the few minutes we have left, I want to talk a little bit about the US labor market. In addition to the Q2 GDP numbers, we've got some jobs numbers as well. US initial jobless claims rose 1.4 million last week-- again, the second straight weekly rise. What's your take on that?
- Yeah, well, that's a really important number to watch because we have seen the job numbers actually outperform. I mean, jobs came back-- over 4 million jobs created in June. And now we're really looking to July, to the second half of this year, as evidence of rising case counts come up. Is that going to be maintained? And it's looking like, in a lot of high frequency data-- most especially in this jobless claims data-- that the job recovery has stalled.
So at a minimum, we're likely to see a slowdown in the rate of recovery. You know, keep in mind, we've only recovered about 40% of the jobs that were lost during the crisis. So slowing that down means, you know, it's going to take that much longer to fill that hole. But certainly the increase in claims reflects what we're seeing in terms of other high frequency data for a slowdown in activity as we've seen cases rise and people really take more precautions, even if not mandated by governments, but just pull back on spending, stay away from restaurants just because they're worried about catching the virus.
- James, thank you very much for your insights.
- You're welcome.
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