Moneybox

The Economy Shrank at a Record Pace This Spring. But That’s Not the Really Bad News.

A red stop sign is seen on a window looking into a hospital room.
More than a quarter of the economic decline was due to drops in health care spending. Mario Tama/Getty Images

The government’s official stats are in, and as you might have expected, the economy shrank a tad this spring while we were all busy huddling in our apartments. Gross domestic product fell at a record 32.9 percent annual rate from April through June—which is to say, that’s how much it would theoretically decline if it kept collapsing at that pace for a full year. Like many economic stats from these past few surreal months, it makes for a kind of funny graph. (Look to the far right.)

A chart showing GDP decline from around 1950 to 2020
Federal Reserve Bank of St. Louis

Another way to think about it is that economic activity in the second quarter fell 9.5 percent compared with the three months before. (It’s also about 9.5 percent smaller compared with the same quarter a year ago.) Either way you look at the numbers, it’s a big drop. Quarter on quarter, almost 62 percent of the decline in activity was due to shrinking spending on services, and health care alone accounted for 26 percent of the plunge, as hospitals were forced to put off surgeries to care for coronavirus patients and Americans delayed visiting the doctor. For obvious reasons, journalists have focused a great deal on the impact of the coronavirus on businesses like restaurants, theme parks, and airlines, which have been visibly forced to shut down and have in some cases seen a bigger share of their own business vanish, as shown on the graph below. But a big piece of the coronavirus recession has been a health care recession.

A bar graph showing drops in consumer expenditures in the second quarter of 2020
Jordan Weissmann/Slate

With all of that said, Thursday’s report is actually a bit less awful than expected. Economists surveyed by Dow Jones were anticipating a 34.7 percent annualized drop in GDP. In its most recent projections, the Congressional Budget Office projected a 38 percent annualized plunge, or an 11 percent decline from the first quarter. Thursday’s numbers will be revised in the coming months, but they aren’t showing us anything we didn’t see coming.

This morning did provide some slightly more surprising bad news, however, which has helped send stock prices falling. The Department of Labor reports that new claims for unemployment insurance actually increased last week for the second time in a row, and the share of Americans on state jobless rolls increased from 11.2 percent to 11.6 percent. (That doesn’t count those receiving federal benefits aimed at freelancers and other workers not traditionally eligible for benefits.) Like the GDP report, this information is not a total shock. States have been forced to close businesses back down to deal with coronavirus flare-ups, some employers are running out of funds from the Paycheck Protection Program, and others are simply giving in to layoffs or closing for good as the crisis wears on. The Census Bureau’s Household Pulse Survey has also suggested that job losses might tick up in July. Thursday’s unemployment claims seem to be some additional confirmation that the economy is again faltering.

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