NEW YORK, NEW YORK – JULY 21: People walk by a closed business on July 21, 2020 in the Brooklyn borough of New York City. As the United States economy continues to struggle due to the coronavirus pandemic, a surge in corporate bankruptcies is only adding to a difficult labor market. Through June 30 of this year, there have been more than 3,600 Chapter 11 filings, including by such well-known companies as J. Crew, Neiman Marcus, Hertz and others. (Photo by Spencer Platt/Getty Images)
Headlines have been buzzing about what seems like the latest omen of doomsday: According to a report released today, the gross domestic product (GDP) nosedived by 32.9% on an annualized rate in Q2 of this year — that is, April through June. The key takeaway seems to be that it marks a fall worse than during the Great Depression. But what does this percentage actually mean? Has the economy really shrivelled by almost a third since the first quarter of this year? Ahead, we’ve broken down where the 32.9% comes from and what it really portends for our future.
What exactly is the GDP?
The GDP is the value of all goods and services produced by everyone in the country over a year. That includes everything we buy as consumers, which is by far the biggest chunk of the GDP, as well as investments, government spending, and net exports. It can be expressed as a dollar amount — for example, the GDP in 2019 was $21.43 trillion. But each quarter, the U.S. Department of Commerce releases a report on how much the GDP has increased or shrunk compared to the previous quarter, expressed as a percentage. The GDP is a popular metric the U.S. government uses to note trends in the nation’s economic health. In fact, the concept of a GDP was developed in response to the Great Depression, when there wasn’t yet a more comprehensive way to measure the whole economy, which made it harder to address the depression.
Did the GDP really fall by 32.9% from April to June?
It’s a little more complicated than that. In the U.S., GDP is reported as an annualized rate, as mentioned above — and this phrase is doing a lot of lifting here. Because the GDP is a measure of value produced over a year, when the percent change is reported each quarter, it’s a forecast of what the growth or shrink would be if this quarterly rate persisted for the whole year. It’s not exactly multiplying the quarterly rate by four, because there are other factors involved, but that’s an easy way of roughly visualizing what the annualized rate is. Doing this can be useful for comparing changes in the GDP over a longer time frame — when there isn’t an extremely unusual event shaking up the economy.
The actual quarterly drop is smaller, but still terrifying
The real damage is that the GDP shrank by 9.5% from April to June compared to Q1 2020. When comparing from year to year, looking at Q2 2020 versus Q2 2019, the percent decrease is also about 9.5%. And we shouldn’t downplay that; the GDP falling by almost 10% is extremely bad. The biggest quarterly drop on record was 10% in 1958. The biggest drop over a full year was in 1932, during the height of the Great Depression, when the GDP shrank by 12.9% — the government doesn’t have quarterly reports on GDP that far back.
It means that if the annualized decrease of 32.9% came true — as in, the most recent rate of shrink maintained itself over a year — it would far outpace the worst of the Great Depression. It doesn’t mean it will happen, but it’s a blaring siren that something has to change fast. Yesterday, over 68,000 new COVID-19 cases were reported, according to the New York Times. The virus is far from being contained, which means that many businesses will continue to be closed, or will feel forced to reopen before it’s safe, or in some states, like California, may even have to close again after reopening.
What’s the solution?
There’s an obvious way to lessen the economic devastation staring us right in the face. A generous fourth stimulus package (which lawmakers are arguing over in Congress right now) could buy everyone the time to go into a strict lockdown for a period, reducing the unmanageable rate of new cases and getting to a point where regular large-scale contact tracing can be combined with mass testing. Other countries have done lockdowns of varying degrees throughout the year and have now come out of it, keeping cases at a manageable level so far. The U.S. has the wealth and resources to do the same.
But that requires making it financially feasible for people to stay home: another direct stimulus payment, more supplemental federal unemployment benefits, rent assistance, and a renewal of eviction moratoriums, among other things. Though Senate Republicans are eager to slash the $600 in extra unemployment Americans have been receiving since April, claiming it incentivizes laziness, data shows that the unemployment boost not only helped those receiving benefits survive in an economy without enough jobs, it also pushed them to spend more during the pandemic than they might have otherwise. While overall consumer spending in Q2 fell by 10%, consumer spending for unemployment recipients increased by 10%. Even those who don’t care about the morality of people being able to afford basics like housing and food might want to care about the larger economics of what happens when you leave so many Americans — you know, the people who produce the value of the GDP — hung out to dry.
Last week, another 1.4 million people filed new unemployment claims as COVID-19 cases kept rising in populous states. One of the largest looming worries about the economy is that it’s already too late for some jobs to come back — the haphazard shutdowns have been so protracted that it’s resulted in many jobs being permanently lost. Women face a greater risk of not only being laid off, but of exiting the labor force altogether, because they’re still usually the caretakers of any children they have, and there’s a crisis of affordable, accessible child care right now. Black and Brown women face much higher levels of unemployment than white Americans. In a recent poll conducted by the Associated Press-NORC Center for Public Affairs Research, 47% of those who lost a job from COVID-19 said they believe their job is probably or definitely gone for good. In April, 78% expected their job to come back.
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