U.S. Economy Contracted at Record Rate Last Quarter
wsj.com
wsj.com
Annualized figures might make sense in ordinary times, but these are not ordinary times.
This is more like the general populace not understanding how finance works rather than the finance press exaggerating the number.
That figure (32.9%) is based on future projections. Stating the predicted future as something that took place already would get someone fired in finance.
>> This is more like the general populace not understanding how finance works
It looks to me more closely as someone applying mathematical formulas either without understanding what you are doing de-facto behind them, or being ill intended in the first place to manipulate the market. Either way, it's bad.
Unless you're explicitly writing "in Q2, the GDP dropped at an annualized rate of -33%", you're committing the capital offense when it comes to writing good journalism: not knowing your average audience, not adapting your content to the audience and probably most significantly, not understanding as a journalist what you're writing about.
Actually it looks like just the HN headline is wrong. The article states it correctly.
It's typical for us in the HN crowd to have a superficial knowledge of a domain and get lost in quibbling about the minutae of how the data is represented, but the thesis of this article is the record decline, and focusing on the use of the annualized metric feels like a tangent.
How exactly annualization works?
.905^4 = .671
1-.671 = .329 = 32.9%
Thanks for the clarification in grandparent comment, i wasn't aware.
Edit: I assumed it was compared to the second quarter 2019, not sequentially to the first quarter 2020, I didn’t stop to think that 33% was just too much. 9% is bad enough: from $21.34 trillion to $19.41 trillion (Q2 2019 to Q2 2020).
@Dang? add "annualised" or "annual rate"?
U.S. economic output fell 9.5 percent in the second quarter, the biggest drop on record. That translates to a 32.9 percent annual rate of decline.
Here we are a few months later and the market has gone gangbusters. This is probably a consequence of zero-interest rates as there's really nowhere else for money to go. You have amateurs jumping into the market based largely on the market can only go up and you can't lose.
Once the market is disconnected from the economy like this it's just a question of when not if you have a reversion to mean and the market will typically get oversold when that happens. But how long will that take? I honestly have no idea. It could be months. Hell, it could even be years.
But a drop in GDP this large is shocking, probably even more shocking than people suspected. And before this I think a lot of people expected things would just get back to normal at some point. But a certain number of businesses and jobs are simply gone. That'll affect demand and probably take years to recover.
I've got a bad feeling about this.
Some more "fun facts":
- this is the biggest drop on record for GDP: 32.9%.
That far surpasses the previous historical contraction of 10% in 1958.
- 19th reporting period where initial jobless claims came in above 1,000,000 that is stunning
- Personal consumption: -34.6%
- Government spending: +2.7%
- 2Q GDP Price Index Falls at A 1.8% Annual Rate
- Domestic investment: -49%
- 2Q Core PCE Price Index Falls at A 1.1% Annual Rate
- 17 million people collecting money from teh government
- 2Q Personal Consumption Falls at 34.6% Annual Rate
and the kicker
When you compare the last three years of Obama’s Presidency vs. Trump’s first three years, Trump’s deficits will be almost $1 trillion greater at $2.47 trillion to $1.51 trillion for Obama. It doesn’t look like Trump’s tax cuts will pay for themselves.
The US under Trump will add about the same amount to the nation debt in 4 years as Obama did in 8 and Obama inherited the "great recession"
https://www.whitehouse.gov/wp-content/uploads/2020/02/budget...
For those of you who like to dive into the numbers
https://www.bea.gov/sites/default/files/2020-07/tech2q20_adv...
From Bloomberg:
- Some categories actually added to GDP: consumer spending on cars, recreational goods, housing and utilities (as people worked from home and ran air conditioners longer?), and financial services and insurance.
- Other categories in positive territory: information processing equipment at companies (all other categories detracted from GDP), net exports, and government spending.
- China has only bought about 23% of its promised purchases for the year from the phase 1 trade deal so we probably can't look to China to buy the US out of its depression
A couple of examples: many businesses reliant on tourist seasons will not have begun to feel the pinch until very recently, and will lag behind others in showing up in the reporting for most indicators.
In the UK, the government furlough scheme means that the true picture of joblessness will only become apparent once people are removed from furlough and laid off.
It seems to me (not an economist) that Q4 will be extraordinarily difficult and it's hard to see optimism for a pan-European recovery beginning until Q2 2021.
The US is in a significantly worse position and many seem to expect states to continue with severe restrictions to simply prevent the further spread of the virus until the summer of next year, let alone beginning an economic recovery.
I'm certain that once this pandemic is over, there will probably be some people who scoop up these shops for a steal, people will move back into the cities with rents depressed, and things will start recovering, but there will be a HUGE scar left that will keep consumer confidence down for a while. I'm worried that the millennials, having faced the second major economic blow in their short careers (mine included), are going to forever hold on to this trauma.
Yes, the ultra rich. This pandemic has resulted in the greatest upward transfer of wealth in history.
The thing that kind of worries me is, as soon as people can't afford their mortgages anymore we might well have a new real estate crisis on our hands. The last one tanked the global economy all by itself, now the economy is already leaking left and right.
Just skimming [0], but I think the last president not preside over growth of the US debt was Calvin Coolidge in 1923. In recent years, Bill Clinton was quite unusual for not doubling the debt in his tenure.
It doesn't take away from your point, but Trump has to see a debt blowout of > ~$20 trillion for anyone who believes in data to bat an eye. The US government literally doesn't believe in fiscal prudence.
[0] https://www.thebalance.com/us-debt-by-president-by-dollar-an...
Based on these figures, over 90% of the economy was open.
Activity is down 9.5%. That means over 90% of the economy is working fine. “Severely hampered” is in the 9.5%.
Most of the economy simply does not require people to be running around and congregating anymore. It’s automated or knowledge based. The 1950s view of our economy is part of the reason we’re seeing more damage than other countries.
Hospitality/Hotels Conventions Restaurant/Bars Movie Theaters, Opera, Musicals Museums
I could go on.
Again, they’re in that 9.5%. The economy is many trillions of dollars large.
Nobody is saying 9.5% is fine. But the 90% isn’t hampered or cowering in fear. It’s producing.
To be clear: this is a fair comparison because it doesn't include the pandemic.
It's worth noting that this isn't unique to Trump. Deficits increased under Reagan and Bush, while deficits decreased under Clinton and Obama[1]. Republican austerity claims are thoroughly debunked bullshit at this point.
[1] https://www.politifact.com/factchecks/2019/jul/29/tweets/rep...
Did anybody actually believe that?
If you remove the pointless politicking, this is a very informative comment. Thanks for putting all that data together. It seems strange to lay out the completely unprecedented context, then proceed to ignore it in order to make a political claim though.
If you feel that facts reflect poorly upon your political position, that sounds like something you should address.
And to be clear: the statements you're quoting specifically exclude the pandemic, so I'm not sure what you feel is "the completely unprecedented context" here.
It's difficult to compare this quarter to those in 1918, given the dramatic differences in the composition of the economies and statistical methods. But a ~10% reduction in flows doesn't strike me as that bad to the country's long-term potential.
The assets are mostly still there. And nobody is forgetting how to do their job in 3 to 6 months, though productivity in some sectors will take a hit from the changes.
This is the part that isn't getting enough attention. That "stimulus" came in the form of treasury bonds. Those bonds need to be bought by... someone.
Foreign central banks stopped net buying US treasuries a few years ago. At the same time, gold holdings by central banks have climbed. The world outside the US is thumbing its nose at US federal debt as a reserve asset.
Without deep-pocket buyers, the interest rate on US debt will rise, and continue rising until a suitably-high interest rate can be found to justify the risk of loss.
So the Fed has stepped into the void and bought the treasuries in unprecedented quantities:
https://fred.stlouisfed.org/series/WALCL
It turns out even this isn't enough to soak up all the debt being issued. Regulations have been relaxed so that banks can claim treasury holdings as reserves. The Fed has deputized banks as holders of US debt.
https://www.federalreserve.gov/newsevents/pressreleases/bcre...
This sets up a situation in which US treasury yields simply can't be allowed to spike because if that happened:
1. banks would suffer capital losses
2. the US government would become unable to sustain interest payments on new debt. That means forced cuts to entitlements and even the military.
Clearly, this would spell disaster. So it's not going to happen. The Fed will keep buying and buying and buying. If need be, regulations will be changed to allow the Fed to buy things it has never been able to buy before. Like US stocks.
The party can never, ever end. The balance sheet expansion will continue until some factor emerges that causes more pain as the balance sheet expands. I'm not sure what that factor could be, but it would come as a very big shock.
For clues regarding the limit of Fed money printing, look to the enormous asset bubble that's developing in US stocks. The more the balance sheet expands, the bigger this bubble gets. And for the foreseeable future, the Fed can't stop printing.
What breaks first?
Oddly enough, when you compare them to the 12 other states with lower than or equal population density, they are fairing significantly better.
https://offloop.net/covid19/?default=New%20Mexico;Montana;Wy...
I used the term most of Europe and especially the UK.
Let's, instead, say 'parts of Europe' and 'the UK' and these figures paint a different story.
https://www.statista.com/statistics/1102288/coronavirus-deat...
Meanwhile the deaths per day in the US are still on a strong upward trend with well over 1000 deaths per day and climbing.
1. Economy is fine, their stocks end up growing in $$$ terms. Hence high price.
2. Economy tanks, US prints new dollars to pay off loans, US dollar loses lots of its value, but because the company stocks are denominated in dollars, the stocks are still worth a lot of dollars.
It's best to use terms like the Fed, the US government and US corporations rather than "the US". They're all different.
The possible scenarios investors see are much more varied and nuanced than the two options you've outlined.
Oil trading is a negligible component of dollar demand [1]. The petrodollar hypothesis is a debunked myth.
The origin is Bretton Woods [1]. This was the international system set at the end of World War II, when the U.S. was a global nuclear hegemon and the largest developed country with a homeland unmarred by conflict.
It retains the role due to a confluence of the America's relative political stability (as in no revolutions), commitment to open financial markets, deep and complex financial markets and, most critically, massive consumer base.
American consumers spend dollars globally. That leaves U.S. dollar scattered in various merchants' accounts. They can swap those dollars to their local currency, which incurs a fee. Or they can hold it to spend later. If they're holding it, they--or their bank--will invest it to produce yield. That creates demand for dollar-denominated investments, which, in turn, makes it easier to raise capital in dollars. That confluence underwrites a financial system that offers more products, for cheaper, and in more variety, in U.S. dollars than in any other currency.
Plainly put, America's post-war position put the U.S. dollar in the lead just as computing advances increased the global financial system's connectivity and complexity. It's a story of network effects.
Sounds like a free market isn't good for the Free Market. A crashed stock market would create opportunity for new investors to invest during this historic downturn...instead during this historic downturn the market is being artificially supported (at record high prices nonetheless) so no new investors will enter.
Free market economics asides, I could imagine the bourgeois and bourgeoise running around during the French Revolution telling the plebs how revolutions and guillotines aren't good for the economy.
Since then i've come to believe that lives are tied to market prices so it's more complicated. You can let it crash and create opportunity for new investor, you can also watch someone drown and create a new spot at the pool. ...it gets complicated.
https://finance.zacks.com/effects-stock-market-pension-funds...
While it's true that the top 5% owns a disproportionate amount of stocks, that's just a function of the wealth distribution. If everyone in the US had half of their personal wealth in the stock market, the top 5% would still own a large % of the stock market just by virtue of what it means to be in the "top 5%" today. This fact doesn't change the fact that a stock market crash would still be devastating to the middle American that owns stocks (directly or indirectly).
In fact, when the stock market crashes, it's median stock holders that are the worst off, because the wealthiest stock owners will still largely remain millionaires even if the stock market plunged.
But its negligible ownership stake, during the pandemic we have seen the multiple single day market swings that more than erase the collective holdings of 80% of investors. Moreover, 1% of investors own more than 33% of the market and the top 10% own >80% of the US stock market, that type of top heavy system is always bound to topple.
Yes, and that was addressed immediately in the next paragraph:
> While it's true that the top 5% owns a disproportionate amount of stocks, that's just a function of the wealth distribution. If everyone in the US had half of their personal wealth in the stock market, the top 5% would still own a large % of the stock market just by virtue of what it means to be in the "top 5%" today. This fact doesn't change the fact that a stock market crash would still be devastating to the middle American that owns stocks (directly or indirectly).
> In fact, when the stock market crashes, it's median stock holders that are the worst off, because the wealthiest stock owners will still largely remain millionaires even if the stock market plunged.
54% of Americans owning at least one share isn't especially meaningful. Giving the stock market a boost doesn't help people with one share. It helps people who have the majority of their net worth tied up in it. Those people are deliberately left out of that statistic.
A stock market crash doesn't affect the median citizen the worst. The median citizen has more % of their wealth in housing than the stock market (what they do have, which isn't an awful lot) .
In percentage terms its the ultra wealthy who get fucked. And it's them who got bailed out. And it's them who love that 54% statistic.
Moreover the stock market is inversely correlated with wages as a % of GDP (money that doesn't go into wages goes into profits, which pushes up stock prices) . If wages go up and the stock market goes down that DEFINITELY helps the median citizen.
I provided that context in the elucidation:
> While it's true that the top 5% owns a disproportionate amount of stocks, that's just a function of the wealth distribution. If everyone in the US had half of their personal wealth in the stock market, the top 5% would still own a large % of the stock market just by virtue of what it means to be in the "top 5%" today. This fact doesn't change the fact that a stock market crash would still be devastating to the middle American that owns stocks (directly or indirectly).
> In fact, when the stock market crashes, it's median stock holders that are the worst off, because the wealthiest stock owners will still largely remain millionaires even if the stock market plunged.
Just because the top 5% owns a highly concentrated amount of the stock market by nominal value, does not mean that the median American is immune to shocks in the stock market, and arguably the latter is impacted more adversely than the former.
> Moreover the stock market is inversely correlated with wages as a % of GDP. If wages go up and the stock market goes down that DEFINITELY helps the median citizen.
Stock market being inversely correlated with wages as a % of GDP does not imply that when the stock market falls, wages will rise, there is 0 evidence of that having ever happened in history. When the stock market falls, unemployment increases, so average wages fall.
The reason why a healthy stock market inversely correlates with wages as a % of GDP is because stock market increase as a % of GDP can be much higher than wages as a % of GDP. You can't take that observation then conclude that if you tank the stock market, wages will magically rise. As a % of GDP, they may stay the same, but that's just because GDP dramatically falls.
Yeah but they don't do they? If you wanted to "contextualize" you could have used a statistic along these lines (not that it's true) instead of arguing that 54% of Americans own at least one $4 share so they might get fucked by a stock market collapse.
In the public sector, 83% of workers participate in a workplace retirement plan.
The median earner doesn't own "1 stock", they indirectly hold stock through 401(k)s, IRAs, company-provided pensions, or government-provided pensions. The vast majority of your pension plans are managed and administered by institutional investors.
If you are a median earner, and your defined contribution plan tanks, you will absolutely be worse off than the multi-hundred millionaire whose net worth still remains in the millions even if their ownership in the stock market falls by 90%.
http://www.pensionrights.org/publications/statistic/how-many...
If they try to do this indefinitely, and just keep printing money to inflate asset prices no matter the consequences, then eventually they will cause the value of the dollar to fall, which will cause international organizations to reduce their dependence on the dollar, which will cause the value of the dollar to fall more, and so on until we lose our position as the reserve currency. There is no free lunch. All this short term thinking eventually has a cost.
edit: It will be interesting if Biden is elected and then a vaccine comes out, the economy rebounds, will he take credit? I would expect him to as would any other politician would but, man, Trump's twitter rage will be epic.
Every night most of us go to sleep between 11pm and 6am. National economic output drops around 90%. Massive disaster, recession, depression level issues. And no one bats an eye lid. Because there is a good reason for this and everyone will wake up in the next 7 hours and go back to work.
This is that but for 7 months instead of 7 hours.
The question everyone should care about is "Will we wake up, when and how many companies will have died in their sleep?" Not "How much work are companies doing while they sleep?".
Those two numbers are barely related IMHO. In fact, the safer we make it to sleep, the less activity we will see now BUT the more we will see in a few months, years etc.
We want this to be a "V-shaped" recovery, but I don't think the recovery is going to be nearly as abrupt as the shutdown.
I think 17 would be more reasonable estimate. Do you think that when a first dose of the vaccine is made the global pandemic will be over?
But to say they aren’t useful is wrong. We need to know the numbers to understand the damage done to the economy.
I'm in the suburbs of a large city now (I used to commute into the city every day), and looking to move further out now that remote work is a real thing. Land in semi-rural and rural areas is being snapped up like crazy at the moment. I'm shopping. The biggest stumbling bock to us tech workers really being able to spread ourselves out is reliable internet access. Satellite internet is... meh. Hopefully solutions like Musk's starlink will change that soon.
For annual figures, a first approximation is that a month is worth 1/12th of the annual output so I would expect a 8.3% drop for every month that the economy is completely stopped.
34% contraction for a quarter means that the economy essentially stopped for a whole month, and would lead to a 8% contraction for 2020, everything else being equal. But we're not through yet...
It’s not that easy as the US economy was never “completely stopped”. Public services did not stop, grocery stores did not stop, etc. Even today the states have various levels of openness and movement.
Yes, 8.3% is obviously the upper bound and in practice it will always be less per month since the economy will never completely stop. The figure is to provide a ballpark estimate of what to expect and also to estimate how much the economy was impacted.
Yeah. Everyone knew this was going to be bad, which is why the experts were saying we need to get it under control quickly and figure out how to safely operate while the pandemic is in effect. But 2016 happened, so instead we get months and months of lockdown and the accompanying economic devastation.
And that's before the epic blame game even started. Boy, that would be interesting to watch.
It is mostly under control in europe, people understand and accept that if and when there are flareups local lockdowns will happen.
A "new normal" if you will.
Perhaps somewhere we could take lessons from with regards to public health policy.
Unfortunately, no country had ever dealt with anything like this. /s
And yet there seems to be a surprisingly little amount of "What choices did Asian countries make in 2002, 2003, and 2004? Which were effective / ineffective? What were their economic impacts?"
Instead, at the highest Western government levels, there seems to be an assertion that no one has ever faced anything like this before, and the choices that need to be made are without precedent.
Masks worn correctly limits spread, but it's just a piece in the puzzle of tools available, and almost certainly not the most significant one, that is not meeting people.
Look at Finland, Norway and Denmark, they all successfully controlled it so far without mask usage. Catching up with research they now encourage it in indoor situations where you can't distance, even though the recommendation still is to not even be there if possible. Leaving it as a tool available if current measures aren't enough.