Home > Uncategorized > USA record 32.9 percent drop in GDP

USA record 32.9 percent drop in GDP

from Dean Baker

The saving rate hit a record 25.7 percent level in the first quarter, indicating that few of the pandemic checks were spent

The Gross Domestic Product (GDP) shrank at a record 32.9 percent annual rate in the second quarter. While almost all the major categories of GDP fell sharply, a 43.5 percent drop in consumption of services was the largest factor, accounting for 22.9 percentage points of the drop in the quarter. Nonresidential fixed investment also fell sharply, dropping at a 27.0 percent annual rate. Residential investment fell at a 38.7 percent annual rate.

The plunge in service consumption was expected, since this was the segment of the economy hardest hit by the shutdowns. Within services, health care, food services and hotels, and recreation were the biggest factors reducing growth by 9.5 percentage points, 5.6 percentage points, and 4.7 percentage points, respectively.

Spending on health care services fell at a 62.7 percent annual rate in the quarter. This was due to people putting off a wide range of medical and dental checkups and procedures, which far more than offset the care needed by coronavirus patients. The annual rate of decline for food and hotel services was 81.2 percent and for recreation services 93.5 percent.

Consumption of nondurable goods fell at a 15.9 percent annual rate. Declines in clothing and gasoline purchases were the biggest factors, taking 1.0 percentage point and 0.9 percentage points off the quarter’s growth, respectively. Demand for durable goods fell at just a 1.4 percent rate, but this followed a decline of 12.5 percent in the first quarter. Interestingly, spending on cars actually rose slightly in the quarter, adding 0.15 percentage points to growth.

Consumption expenditures by nonprofits serving households rose at 182.5 percent annual rate, adding 3.0 percentage points to the quarter’s growth. This reflects the effort by private foundations and charities to ameliorate the hardships being experienced by many households.

Both structure and equipment investment fell sharply in the quarter, declining at 34.9 percent and 37.7 percent annual rates, respectively. The drop in equipment investment is especially striking since it fell at a 15.2 percent rate in the first quarter. Investment in intellectual products fell at a more modest 7.2 percent annual rate. Residential investment fell at a 38.7 percent annual rate, although this followed a jump of 19.0 percent in the first quarter.

Exports and imports both fell sharply, with exports dropping at a 64.1 percent rate and imports falling at a 53.4 percent rate. Because US imports are so much larger than exports, trade actually added 0.7 percentage points to growth in the quarter.

Federal government spending rose at a 17.4 percent annual rate, driven by a 39.7 percent increase in nondefense spending, presumably most of which is pandemic related. State and local spending fell at a 5.6 percent rate, likely reflecting school closings in the quarter.

Prices fell sharply in the quarter, with the Personal Consumption Expenditure (PCE) deflator falling at a 1.9 percent annual rate and the core PCE falling at a 1.1 percent annual rate. These declines reflected sharp drops in the price of items such as gasoline, hotels, and clothes. Many of these declines were already being reversed by the end of the quarter. They will almost certainly not continue into the third quarter.

The savings rate soared to a record 25.7 percent. This reflects the jump in disposable income attributable to the pandemic checks, coupled with the sharp drop in spending. Nominal disposable income rose at a 42.1 percent annual rate. This rise was, of course, uneven, with people who were still getting their regular paychecks or retirees seeing large jumps in income from the pandemic checks, but with many of the unemployed seeing sharp drops.

  1. July 30, 2020 at 7:12 pm


    You write: “The savings rate soared to a record 25.7 percent. This reflects the jump in disposable income attributable to the pandemic checks, coupled with the sharp drop in spending.”

    No doubt a good many people on unemployment paid off debt or actually saved with the extra $600 per week in unemployment. I know my son did as an out of work bartender. I would guess that the jump in savings is mostly due the more affluent households who were shut out of their travel plans. It would be interesting to know what the 30% highest income households account for in travel and leisure spending.

  2. Ikonoclast
    July 30, 2020 at 10:08 pm

    Yes, I can’t imagine savings of the poor soaring. They live day to day or week to week at best. Just about all savings would be among the upper 20 percentile at my guess (using the heuristic of the 80-20 rule).

  3. July 31, 2020 at 10:37 am

    It would not be shocking that an economy with economists who do not recognize the economic dynamics and vulnerability encountered such a disaster! While curing the woeful damage, it is wishful not forgetting the reform of economics this time!

  4. August 3, 2020 at 8:44 am

    This “savings increase” cannot be right. Here in NYC, working class people are barely holding on through a combination of $600/week mostly replacement of wages, a temporary ban on evictions (which has now expired), cutting back not only on the things listed, but on basic necessities including rent; 25% of NYC renters have not paid rent since March: https://nypost.com/2020/07/09/25-percent-of-nyc-renters-have-not-made-payments-since-march/. And people aren’t stupid enough to just forego paying rent because there was a temporary “rent holiday.” There is general panic everywhere over evictions, not the sort of money hoarding that would show up elsewhere in spending patterns, which, as Dean shows, are not appearing in any consumer spending category. Also, there are long lines of people trying to get free food. Why would people put up with that unless they had to?
    To say there is an increase in spending belies the reality on the ground.
    Maybe Dean is confusing the rise in saving among those who have money in the stock market, a tiny percentage of people, but a huge percentage of wealth, even larger since the mostly asset-inflating CARES package was passed.

  5. Ken Zimmerman
    August 11, 2020 at 4:52 pm

    This seems really bad. But remember that GDP is a measure of all ‘economic’ activity. That means most of the charity and ‘good work’ that help many people and entire societies is not included. It is NOT economic. Also, a lot of economic activity is physically, morally, spiritually, and socially harmful to both societies and individual humans. For example, new ‘recreation’ areas add more pollution, increase climate change, and take resources that could be used for sustainable habitats and communities. ‘Fracking’ another oil or gas well is even worse. And we certainly do not need any more fossil fuel automobiles produced. But each of these adds a great deal to the GDP. GDP is a perverted and useless indicator of the well being of human societies. We need to end its use, before its use ends us.

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