I lie awake at night to wait till you come in. You stay a little while and then you’re gone again. Every question that I ask I get a lie, lie, lie, for every lie you tell you’re gonna cry, cry, cry. You’re gonna cry, cry, cry and you’ll cry alone. When everyone’s forgotten and you’re left on your own, you’re gonna cry, cry, cry. Soon your sugar-daddies will all be gone. You wake up some cold day and find you’re alone. You’ll call for me but I’m gonna tell you bye, bye, bye, When I turn around and walk away you’ll cry, cry, cry. Johnny Cash’s 1955 Sun Records single reached #14 on the Best Sellers charts and is considered one of the saddest songs in country music.
One could only use a country (ok rockabilly) song to introduce a discussion on the 2nd quarter GDP numbers. From an economic standpoint, things are even worse than the dog dying, the wife leaving and the truck breaking down.
This morning, as I was on my first flight in nearly four months, the Bureau of Economic Analysis released the 2nd quarter GDP figures. As expected, the numbers were grotesque, with GDP down by almost a third, 32.9 percent, on an annualized basis. Think about what this means. The overall annualized production of the US economy was one third lower than it had been last year. GDP translates into wages, into the stuff that every American consumes, so figure that each of us has to survive on one-third less – and with taxes, rent and mortgages, food and health insurance taking up an average of 44 percent of each American’s income each year, there is not much left to cut out.
When one digs into the numbers, things look even worse. Exports were down by 64.1 percent, and investment was down by 49 percent. These are the categories that one likes to see grow at a fast clip because that means that future production is being supported. On the other hand, the government share of GDP rose substantially, actually rising by 2.7 percent on net. In fact, the government now accounts for 19.8 percent of total GDP, up two whole percentage points from 17.8 percent as of the first quarter.
So while unproductive spending grows, productive production shrinks as a percent of the overall economy.
But even in bad times, some parts of the economy have prospered. Some individual industries including recreational vehicles, off-premise food sales, and even housing all actually grew during the 2nd quarter, while others, including recreational services (down 54 percent), transportation, food service and accommodation (all down 40 percent) and clothing production (down 23 percent) performed extremely poorly as consumers simply could not access these goods and services during quarantines and government-imposed closures.
Interestingly, health care services experienced a 24 percent decline as most private physicians, dentists, and even non-COVID related parts of hospitals were forced to close for long parts of the quarter.
Many pundits and politicians are hoping that things will get better quickly, but I doubt that will be the case. While GDP was down by a third for the quarter, employment was down by only one fifth. Companies require employees to produce stuff, and if production is down by 33 percent, and jobs are down just 20 percent, there is still a lot of room for the unemployment numbers to continue to worsen. And that is exactly what is happening. At the same time the BEA issued the GDP statistics, the Department of Labor put out the weekly jobless claims. Based on these data, the net number of
unemployed people was 30.2 million. Think about it, as some businesses reopened and hired back workers last week, even more closed and laid people off. In fact, the net job loss for the week is 1,434,000, which is 2.5 times the highest monthly job losses during the last recession.
On a positive note, personal income skyrocketed in the quarter, as huge federal deficits were used to drop cash on both the unemployed and on businesses. With consumption down by 34.6 percent, this means that the inability for consumers to spend money because of the government-imposed shutdowns sent most of this money straight into bank accounts, savings, and payment of debts. This suggests that there will eventually be a sizable windfall on the other side for those businesses that are able to survive the depression.
In the short- and medium-term, what is going to happen to the economy is really anybody’s guess. Take it from someone who has been doing this for many business cycles, economic models are not designed to deal with the kind of outlier data that we are looking at. Quarterly GDP has never fallen by so much, not even during the Great Depression. We simply don’t know how to interpret extreme data, and more importantly, the US (nay the world) economy has never completely shut down ever before. Even during the height of World War II markets continued to function.
For the sake of all that is holy, let’s hope that the country is allowed to reopen again soon. Remember what the Man in Black said, When everyone’s forgotten and you’re left on your own, you’re gonna cry, cry, cry.