The Worst Economy Ever?Submitted by InFocus Financial Advisors, Inc. on July 31st, 2020
If you have been paying attention to the news recently, you may have seen some headlines aghast at the destruction that appeared in the recent economic data. While the data was pretty terrible, there are some misunderstandings about how economic data is reported and interpreted.
Let’s start with one of the most familiar and widely reported pieces of economic data, GDP. Gross Domestic Product, or GDP for short, measures the overall economic output from a given countries economy. This data is reported quarterly, but it is expressed on an annualized basis. Not necessarily a reflection of just the last 3 months, but if those 3 months happened over 4 quarters instead. That can lead to some misunderstanding of non-economists about what is transpiring in the economy.
Now let’s take a look at the most recent quarter which has been in the headlines. GDP was reported to decline at a nearly 32.9% contraction. At first glance, you would be thinking our economy shrunk by a third! While it would take a year of similar levels of activity for that to happen, it was still quite a severe downturn. For reference, you can see in the graph below a list of the 10 worst quarterly declines in GDP in the last 100 years. This was certainly a historical decline.
Why were things so bad? Because of the COVID-19 pandemic, we voluntarily shut our economy down. We intended to cease significant amounts of activity to deal with the health crisis. That shows up in the breakdown of GDP, which you can see below.
The grey bar represents consumption. Or, in plain english, you and I and everyone else in America out spending money. When businesses are closed, we can’t spend money. Consumption usually represents nearly 70% of economic output in the United States. While this data is certainly bad, it was actually better than what most economists thought the data might say. Many thought it would be quite a bit worse.
Was this one of the worst economic quarters in U.S. history? Yes. There is a reason such large fiscal stimulus was required. On the other hand, are there some misconceptions about the data and exactly what it says? Yes. We always place great importance on various data sources and the ability to interpret what it says. Sometimes just reading the headlines, can give you the wrong picture.
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