Moneybeat – A historic GDP decline


MARY REICHARD, HOST: Coming up next on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: Not since the year 1947 has this happened.

I mention that date because that’s when we first started measuring an economic data point called Gross Domestic Product. It’s a single data point that represents economic output.

We’ll talk about it a lot, so I’ll just use the initialism GDP.

Not since the very first measure of GDP back in 1947 has GDP fallen as precipitously as it did during the thick of the COVID lockdown. 

I’m talking about 2nd quarter GDP—the months of April, May, and June. 

Comparing 2nd quarter 2020 to 2nd quarter 2019, GDP fell back 9.5 percent year-on-year.

But here’s the stunning number and maybe you’ve heard the headline: when you annualize GDP performance in Q2, the number is negative 32.9 percent.

So now we have two consecutive quarters of negative economic growth. That’s the textbook definition of a recession.

What these percentages refer is the change from one point in time to another.

In terms of actual economic production, again, annualized, the economy was producing at a rate of just over $17 trillion. 

That’s about the level of economic production in early 2015.

So, expressed that way, you could say that the plunge in GDP wiped out roughly five years of economic progress.

Financial analyst and adviser David Bahnsen is here now to help us understand. David, good morning.

DAVID BAHNSEN, GUEST: Good morning, Nick. Good to be with you.

EICHER: So the GDP report is economic history. But we do read history to learn its lessons. There’s so much here to talk about.

BAHNSEN: Yeah.

EICHER: So David, just pick a point and dive in.

BAHNSEN: You know, there’s a few different things that I think were really noteworthy. Let me start with: the consumer represents in that kind of somewhat arbitrary but reasonably acceptable formula for GDP growth, the consumer represents 70 percent of it. And the consumer spending was down 25 percent. That took a big toll. In any different environment—OK? This is sort of the blessings I would say that the sovereign God saw fit to give us a viral pandemic years after so much of our society had gone digital because the reality is that you take away e-commerce, you take away the virtual technology you and I are utilizing right now, all of these numbers become so much worse, it’s frankly unfathomable. So, the numbers were awful. They were much less awful than they would have been if it were not for modern amenities of the economy.

But here’s the part that I think people have to understand. Healthcare represents 12 percent of the economy. Healthcare took away 9 percent from GDP on an annualized basis. How in the world in the middle of a health pandemic do you have healthcare becoming one of the big detractors from economic growth? The answer is that they had shut down all of the elective operations as well. That apart from essentially very COVID and COVID-like illness related, there was almost no healthcare going on. 

Well, you know what, this is a business that has people that go to work that get paid there and it has hospitals and ambulances and research and pharmaceuticals that have revenues that need to come in and expenditures that need to go out. And when you took away all of the ability to go do routine orthopedic procedures, not to mention other things that were more serious—cancer and heart conditions—even apart from the potential medical ramifications of delaying and deferring which I’m not qualified to speak to, economically, that took a much bigger toll than anybody had anticipated.

EICHER: Just that overall issue of services—we talk about goods and services—but the services part, that accounted for 23 percentage points of the decline, of which healthcare was close to half of it—10 percentage points or so.

BAHNSEN: Yeah, I think it was like 9.6, that’s right. 

The thing I want listeners to understand, Nick, that is more important than anything you and I can talk about regarding the second quarter, that the questions that we face right now, the decisions we face, are totally unrelated to what just happened in Q2. What we face is questions about the forward economic growth. The month of July is the first quarter of Q3 and it’s going to be less than we had previously hoped for because of quasi shutdowns around some of the case growth that took place in Texas, Florida, Arizona, other particular states, even states that were not suffering any aspect of the pandemic took an abundance of caution. I happen to think some of it was preposterous, but regardless of that, the constrained economic activity even in states with very little COVID problem right now will limit and neuter some of that economic growth. 

The big questions as to where this economy goes, which affects the labor market, business investment, and our productive growth into the future is how much activity gets going again. August is going to be middle ground and then for Q3, September is going to make or break the quarter. 

And schools reopening, businesses reopening, those things are wildcards that could make the difference between a 15 percent positive quarter or a 5 percent positive quarter. You can’t have a 5 percent positive quarter coming off a 30 percent negative quarter. 

So, we need to have a very big end of Q3 and that’s largely going to be determined by people’s understanding of where we are with the virus and the regulatory apparatus in which we’re functioning.

EICHER: Alright, one more, maybe, on the GDP. This is from a Wall Street Journal editorial: One thing grew in the second quarter, when everything else was shrinking, one bit of growth: the government. It grew 2.7 percent. 

So we had an $800 billion decline in employee compensation and the government response was three times that—$2.4 trillion in transfer payments. 

So, disposable income went up. The savings rate went way up. 

And the Journal said, you know what, this is a window on what a politician-planned economy looks like. Good argument, or no?

BAHNSEN: Well, they’re making the right argument in the wrong way because of course the Keynesian response to that is always of course, it’s because we need more. 

Here’s the fact of the matter, it’s painful socially and culturally, but the large amount of distress taking place in the economy right now is obviously in the lower deciles of job skills and income levels. And so what you’re seeing is a consumption level at lower tiers of the economy that are affected and that is what they’re arguing has to be replaced with stimulus. 

And I think it’s more of a relief or social or humanitarian argument than it is an economic one. The only way you get real economic growth is not through Keynesian solutions, you have to have organic, natural productive economic behavior—so that people are producing goods and services that other people are demanding. This is human action, this is human life, it’s part of God’s story for his creation. And that is what the solution is going to be for restoring economic growth. 

So, certainly along the way there’s debates as to what kind of unemployment, what kind of social safety net, but those things have to be thought of as marginal, not actually economically restorative.

EICHER: Financial analyst and adviser David Bahnsen on the economy. David, thank you.

BAHNSEN: Thank you, Nick.


(AP Photo/Mark Lennihan) An American flag hangs at the New York Stock Exchange, Thursday, July 16, 2020. 

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