Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, April 30, 2020

Taking Our Temperatures

Gross Domestic Product (GDP) data is like taking the temperature of the economy. It is measured quarterly, with annual numbers calculated from the quarterly data. Revisions are common. First quarters are typically anemic, since it’s after Christmas and things have slowed down. Usually, we pick back up by the second quarter. 

Common measures of a recession are “two quarters of negative GDP,” but economists use broader measures to make this determination. Often, we don’t know if we’re in recession until much later, and we certainly don’t know if we’ve turned a corner till even later.

The Great Recession knocked a hole in GDP, with the last quarter of 2008 logging nearly a 9% decline. Despite this, the annual GDP number was only -0.1%. The next year (2009) gave us a -2.5%, but it’s been in positive mode ever since. While most of Americans struggled to get through the Great Recession, GDP numbers show us turning positive fairly quickly, with a GDP rate of 2.6% in 2010, just over one year into the crisis.

Since then, there have been complaints about the slow pace of growth. Why weren’t we growing at 4-5% rates like we did in previous expansions? Meanwhile, Fed economists tamped down these expectations with long-term projections in the 2-2.5% range. What is holding us back?

Well, we are a mature economy. Once an economy reaches a certain size, it’s difficult to maintain higher percentage growth to get EVEN bigger. It’s just math. Plus, our citizens are reaching a certain maturity. We’re getting older, and population growth is slowing. In order to fuel growth, we need a young and growing population. 

While we are better off than Europe and Japan, we are slowing. Yes, we are still reproducing ourselves, with about 2.2 children per family, but that’s less than previous decades. Young families buy more things, and young workers are needed for the labor force. Improvements in production through technology help but can’t bridge all gaps.

Which brings us to today’s numbers. What I wouldn’t give for a 2% GDP growth rate! Instead, the coronavirus has knocked another hole in the economy. While we suspected we were already in recession, the most recent data prove it. The first quarter of 2020 yielded a negative GDP of 4.8%. Whoa!

But that’s not the worst of it! We only got the wind knocked out of us in the last few weeks of the quarter. January and February were good. That means a full second quarter of an economy in lockdown will be much worse. How much worse? Economists are projecting negative rates in the 30-40% range!

I don’t think we need a bunch of economists to tell us we’re in deep you know what! 30 million people are unemployed. Savings increased to 13%. Consumption declined 7.6% last month, putting the driving force in our economy into reverse. What did we stop spending on? Autos and healthcare. Healthcare, you say!?! What’s up with that?

While we are looking to the healthcare profession to save us from the virus, we are stopping all kinds of other health procedures. Of course, we are ramping up spending on groceries. When this is all over, we may need to head back to the doctors to help us with the damage we’ve done with our comfort eating!

When does this all end? Going forward, we hoped for a V shaped recovery. That’s a big drop, with an immediate climb back up to the top. Because of the nature of the illness and our response, we are now expecting a U shape. Yes, by the third quarter, things will be improving but expect to hang around at the bottom of that U until sometime in 2021.

At that point, what will be our biggest worry? Inflation! Pent-up demand may push prices. Combine this with high levels of debt and—yikes! Well, we’ll worry about that one tomorrow. For now, 2% GDP looks pretty good to me, if only we can get back to those days.