Last week, the Bureau of Economic Analysis (BEA) released data on gross domestic product (GDP) for the second quarter of 2020. Following the now well-worn path of months of terrible labor market data, the BEA reported that GDP fell by 9.5 percent in the second quarter, the highest-recorded quarterly decline in US history. If that rate were maintained for four quarters, GDP would decline by a stunning 32.9 percent for the year—the “annualized rate” most people will read about in the news.
Typically, economic shocks are one-time events, so we would not expect repeated quarterly GDP reductions as large as 9.5 percent. But the US is facing serious and persistent public health and policy shocks that policymakers could address to recover from the drop in output in the second quarter.
The BEA reports annualized rates of change because it helps people conceptualize changes in GDP. In normal times, when fluctuations in GDP are more modest, these annualized rates of change can be a helpful benchmark. But when the economy experiences a large shock—such as the onset of the COVID-19 pandemic—annualized rates can present a misleadingly grim picture, especially at the scale we saw last week.
The most important question raised by this report: Will new shocks pose serious obstacles to a robust recovery, or was this spring’s crisis a one-time, temporary shock we will overcome soon?
New economic shocks are looming
Normally, recessions are associated with one big shock, like a financial crisis or tightening monetary policy. The economy dips, often with declines unfolding over a few quarters, followed by a steady (although sometimes disappointingly slow) recovery. This time, unfortunately, there is reason to believe large, new shocks are coming.
- After July 31, the additional $600 per week benefit provided by federal Pandemic Unemployment Compensation (PUC) will expire, and it is unlikely to be renewed at the same level (although smaller packages have been proposed). This and other emergency measures, like the $1,200 economic impact payment, were critical to buoying GDP in the second quarter. In fact, the BEA reports that because of federal emergency programs, personal income actually increased in the second quarter. Removing PUC and other supports will introduce new shocks to GDP in the third quarter of 2020.
- The second-quarter GDP decline is a response to the first wave of the coronavirus (concentrated in New York and New Jersey), and the associated voluntary social distancing and stay-at-home orders across the country. However, new damage is being meted in Arizona, California, Florida, Texas, and many other states as the coronavirus spreads. Although many of these states were already economically damaged by the first wave of the coronavirus, they are now strained in a way they were not in the spring.
- The new school year is starting soon, and students from kindergarten to college are likely to attend virtually (or in some cases, not at all). This will add stress and introduce hard decisions for parents who cannot work from home or who can work from home but will face disruptions from having a student in the house. The disruption of the school year in September could lead to teacher layoffs and other budget cuts. This was not a major feature of the economic crisis in the spring, when most schools muddled through a virtual end of the school year and maintained payrolls.
These new shocks are not already baked into last week’s report, which could mean more trouble ahead as we try to build our way back to the strong economic trajectory we were on in 2019. We will not actually see an annual drop in GDP of 32.9 percent because much of the economic shock from the COVID-19 pandemic has already been absorbed and stronger growth than we saw in April and May has already set in. Forecasters suggest we are unlikely to even see further GDP declines in the third quarter, but there are plenty of warning signs that the pandemic will continue to introduce serious economic shocks.
What are the potential policy solutions?
Even in the best-case scenario, American families will struggle over the next year. The US is in the middle of a pandemic and an economic depression. Many of us are fighting to expose and pull out the deep roots of systemic racism that express themselves most visibly in police brutality against Black Americans. On top of all of this, the November election will have enormous policy repercussions.
How could policymakers address these upcoming economic shocks?
- Additional, generous supplements to unemployment compensation could help keep unemployed workers housed and out of poverty. Failure to act has already introduced a gap in support for workers currently receiving unemployment insurance in August.
- A stronger public health response to the coronavirus could pave the road to stronger growth by suppressing the current wave of COVID-19 cases in southern and western states and mitigate future outbreaks. This response could include additional resources for testing and case tracing and a national call for mask-wearing and other safety measures.
- Future relief packages could provide continued aid to states and local governments. One of the current relief bills would tie most of the proposed aid to states to whether they physically reopen schools. Everyone wants schools to safely open, but states could be forced to choose between a budget crisis and a public health crisis.
Last week’s news of historically large declines in GDP is worse than what we are accustomed to because unlike during “normal” recessions, we can clearly see new shocks and challenges unfolding over the rest of the year. There is a big risk that we will not rebound quickly.
Congress cannot cure COVID-19, but it could take concrete steps to avoid another 9.5 percent quarterly decline in GDP.