U.S. Second Quarter Economic Report; Worse Than Great Depression

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The U.S. government released an abysmal quarterly economic report that dwarfs even the worst quarters of the ’08 Recession and the Great Depression. In the last few months, GDP plunged a jaw-dropping 32.9%. Still, some expected even worse.

GDP Takes A Nosedive

The last two quarters have been extremely tough for most countries. Still, the immense drop in United States GDP is particularly dismal. 

Between April and June this year, gross domestic product fell 32.9%. Gross domestic product, or GDP, generally refers to the total amount of consumption, investment, government spending, and net exports. In the last few months, each of these categories has changed significantly.

Decreased Consumption

The amount that both household and business consumption dropped considerably this year. And many businesses were put on hold or shut down entirely, which means that they were neither buying or selling anything.

Additionally, lockdown measures caused record high unemployment levels. This has led to an overall decrease in household spending as people became more frugal.

Most years, household and personal consumption makes up two-thirds of American GDP. However, this year, the lack of personal spending subtracted 25% from the prior quarter’s GDP. Most experts are blaming the closure of the service industry for this drop.

Fewer Investments

Investments also dropped significantly as investor enthusiasm tanked. Many investors hurried to pull their money out of the market. Others just became less confident about the future of many corporations.

In addition to a contraction in stock purchases, investments on a personal and corporate level also changed dramatically. Most families are less financially secure now than they were before the pandemic. This has caused a lull in the housing market, as people hold off on buying. Businesses also tightened their belts, holding off investing in new equipment.

And while the government has dished out stimulus packages, it has not been enough to offset the factors listed above.

Putting It In Context

The Q2 economic report looks even more depressing in context. First, some good news: The 32.9% GDP plunge wasn’t as bad as expectations. Dow Jones had surveyed economists prior to the release of the report. The average of their expectations was a 34.7% drop. So it could have been worse. Still, it was the most severe drop in GDP that the country has ever seen.

For comparison, we can look to past decreases in GDP. The fourth quarter of 2008 brought about an 8.4% GDP drop. What’s more, the worst quarter of the Great Depression, which took place in fall of 1937, only caused around a 7% drop. Furthermore, the worst quarter ever recorded, before the release of the current report, was a 10% fall. That was in Q1 of 1958. When put into historical context, our current situation is plain shocking.

The Bigger Picture

Record-breaking aside, GDP isn’t everything. It’s important to point out that the current financial crisis is different than the ones we’ve seen before because this has such a tangible, external cause. As such, a large amount of this drop can be accredited to coronavirus-related closures. Luckily, these lockdowns are temporary measures, suggesting that the current economic situation is only temporary.

On the other hand, even if the GDP contraction is temporary, other economic factors may take longer to recover. The unemployment rate, for instance, tells a similarly down-trodden story. But it might not recover as quickly. For 19 weeks straight, initial unemployment claims have totaled over 1 million. It is likely that due to these astounding unemployment levels, people won’t be spending in their regular manner for a long time. So while businesses might reopen soon, they might not see their clientele rushing back. With millions of people facing back rent or missed mortgage payments, they’ll likely keep a tight wallet for the foreseeable future.

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