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Rosalind Gottfried

Economics

August 2, 2020

Policy

The headline 32.9% drop in the Gross Domestic Product (GDP) for the second quarter is stunning, but what does it actually signify?  A Dow Jones survey had predicted a drop of 34.7%.  The GDP represents all the purchases made in the US plus the net exports, government spending, and investments made in the period discussed.  This figure actually indicates what the annual figure would be if the same rate occurred for the entire year.  If this really reflects the annual rate, it will be far worse than the worst year of the depression which was a 12.9% drop in 1932.

The second quarter represents activities from April through June.  The actual figure for the second quarter, compared to the same quarter last year, is 9.5%.  The largest quarterly drop was 10% in 1958.  How does this translate in behavioral terms?  Overall personal consumption, the largest chunk of the GDP, was down 10%.  In contrast, expenditures for the unemployed population rose by 10%.  This is likely attributable to the generous benefits subsidized by the $600 weekly payment provided by the federal government.  Low income workers likely could make purchases of essential goods they had put off for lack of funds.  Spending for healthcare, clothing, footwear was down as was inventory investment for motor vehicle dealerships, equipment, and personal housing.  Prices for domestic purchases fell 1.5% and for personal care expenditures 1.9%, indicating some deflation. Exports were down by 9.4% and offset by increases in imports of 10%.

The last week of July saw 1.4 million filings for new unemployment claims.  New claims filed by gig and self-employed workers were at 830,000 for the same week.  This continued an upward trend for the past two weeks, down from 15 weeks previously where the claims had decreased after the initial virus swelling.  Nevertheless, claims numbered over one million for the past 19 weeks.  Research indicates a spreading pessimism as 47% of the unemployed expect their jobs to be permanently lost while in April 78% expected to return to their jobs.  Unemployment for women, particularly women of color, is really at risk partially due to the types of jobs they have had and also as a consequence of lack of childcare.

Stocks fell in response to the data though the tech industry has had explosive growth.  Facebook, for example, reports an 11% uptake in revenue compared to the same quarter in 2019.  They report a profit increase of 98%.  Three billion people use one of its apps regularly and 2.47 billion do so daily.  This use data is an increase of 12% from a year ago and likely reflects the greater dependence on tech due to the sheltering in place mandates. June saw a grass roots campaign Stop the Hate for Profit to pressure advertisers to pull back ads to protest hate speech on the sites.  Sources admitted that Facebook did see an impact in their July figures as a consequence of the campaign.  Zuckerberg, chief executive of Facebook, pledged to maintain his free speech policies in spite of the campaign.

Analysis

Most of the trends seen in the second quarter represent the dramatic impact of a full quarter of viral repercussions.  There was some mitigation in the reopening that occurred in June, much of which has been drawn back.  It is notable that spending went up only for the unemployed which has been attributed to the government payouts and unemployment aid.  These have not yet been renewed and Federal Covid-19  unemployment benefits  ended July 31st. The consequences of a failure to provide another stimulus package are imagined to be dire.  In order to divert the worst possible economic fallout another stimulus should be imminent and generous.  There should be more cash transfers to all low and moderate income; sustained generous federal aid for the unemployed; rent assistance; an eviction moratorium; subsidies for childcare and healthcare; and aid for schools and communities.  With appropriate planning the worst economic fallout can be averted.  The successes in the government programs of the European Union can be used as guides.

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