|Worse Lies Ahead||
30 July 2020
Cogito Ergo Non Serviam
The second quarter of 2020 was the worst on record when it comes to measuring the US GDP. From April to June, the economy shrank 9.5%, which works out to 32.9% on an annualized basis. The result is the worst since at least 1875. Even the Great Depression and the 1893 Panic were not as bad at 7.2% and 8.4% declines respectively. The crash is unique in that it was voluntary to fight the corona virus, but its magnitude suggest that the recovery will be slow. Moreover, policy errors are going to do further harm.
The Bureau of Economic Analysis in the Commerce Department reported, "Current-dollar GDP [bold in the original] decreased 34.3 percent, or $2.15 trillion, in the second quarter to a level of $19.41 trillion. In the first quarter, GDP decreased 3.4 percent, or $186.3 billion." That is a disaster by any measure.
However the BEA also noted, "Current-dollar personal income increased $1.39 trillion in the second quarter, compared with an increase of $193.4 billion in the first quarter. The increase in personal income was more than accounted for by an increase in personal current transfer receipts (notably, government social benefits) that was partly offset by declines in compensation and proprietors' income."
Put in plainer terms, the government programs designed to keep people afloat worked. The maligned and maladministered Payroll Protection Program, the emergency loans, the $1200 stimulus payment and the extra $600 a week in unemployment benefits actually boosted personal income and prevented worse suffering.
Income was up, spending was down, and people saved. The BEA stated "Disposable personal income increased $1.53 trillion, or 42.1 percent, in the second quarter, compared with an increase of $157.8 billion, or 3.9 percent, in the first quarter. Real disposable personal income increased 44.9 percent, compared with an increase of 2.6 percent.
"Personal outlays decreased $1.57 trillion, after decreasing $232.5 billion. The decrease in outlays was led by a decrease in PCE for services.
"Personal saving was $4.69 trillion in the second quarter, compared with $1.59 trillion in the first quarter. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 25.7 percent in the second quarter, compared with 9.5 percent in the first quarter."
The question is what happens next? PPP and the extra $600 have run their course. Congress is unable to agree on another set of relief efforts. So, about $12 billion a week is going to be sucked out of the economy with the end of the $600, roughly $50 billion a month. People have saved some, but the rent and mortgage moratorium has also expired, so there are some hefty bills for accommodation that must be paid, mostly out of the savings, and some not at all. Homelessness is going to rise and social services are going to be stressed even more.
The recovery, such as it was, is already faltering. Fed Chairman Jerome Powell said in a news conference yesterday, "On balance, it looks like the data are pointing to a slowing in the pace of the recovery. I want to stress it's too early to say both how large that is and how sustained it will be." Its size and duration are functions of government policy, both health policy and economic policy.
The key as been to fix the pandemic health issues, and the economy would fix itself. Failure on the health issues has aggravated the other problems. The worst is yet to come.
© Copyright 2020 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.