
U.S. Economy Contracted at Record Rate Last Quarter - nickles
https://www.wsj.com/articles/us-economy-gdp-report-second-quarter-coronavirus-11596061406
======
civilized
It didn't. It contracted by 9.5% in Q2, which, if repeated for four
consecutive quarters, would become 32.9%.

Annualized figures _might_ make sense in ordinary times, but these are not
ordinary times.

~~~
kgwgk
[this is terribly wrong: “It did contract by 32.9% in the second quarter (not
in the four quarters ending in June 2020)”]

Edit: I assumed it was compared to the second quarter 2019, not sequentially
to the first quarter 2020, I didn’t stop to think that 33% was just too much.
9% is bad enough: from $21.34 trillion to $19.41 trillion (Q2 2019 to Q2
2020).

~~~
FabHK
No. Goes to show how misleading the headline is (particularly the HN headline
- was there no space for the important clarification "annual rate"?)

@Dang? add "annualised" or "annual rate"?

~~~
nickles
The article headline changed since this was posted. I've updated it to reflect
the new title.

------
cletus
So what I find interesting--even scary--is the disconnect between the economy
and the stock market. Back in April near the bottom the advice I gave was that
this was pretty serious and it's going to knock the economy off its feet so
don't treat this like a short-term buying opportunity.

Here we are a few months later and the market has gone gangbusters. This is
probably a consequence of zero-interest rates as there's really nowhere else
for money to go. You have amateurs jumping into the market based largely on
the market can only go up and you can't lose.

Once the market is disconnected from the economy like this it's just a
question of when not if you have a reversion to mean and the market will
typically get oversold when that happens. But how long will that take? I
honestly have no idea. It could be months. Hell, it could even be years.

But a drop in GDP this large is shocking, probably even more shocking than
people suspected. And before this I think a lot of people expected things
would just get back to normal at some point. But a certain number of
businesses and jobs are simply gone. That'll affect demand and probably take
years to recover.

I've got a bad feeling about this.

------
chollida1
This is getting into scary territory given that the US also spent 3.5 trillion
to prop up the economy.

Some more "fun facts":

\- this is the biggest drop on record for GDP: 32.9%.

That far surpasses the previous historical contraction of 10% in 1958.

\- 19th reporting period where initial jobless claims came in above 1,000,000
that is stunning

\- Personal consumption: -34.6%

\- Government spending: +2.7%

\- 2Q GDP Price Index Falls at A 1.8% Annual Rate

\- Domestic investment: -49%

\- 2Q Core PCE Price Index Falls at A 1.1% Annual Rate

\- 17 million people collecting money from teh government

\- 2Q Personal Consumption Falls at 34.6% Annual Rate

and the kicker

When you compare the last three years of Obama’s Presidency vs. Trump’s first
three years, Trump’s deficits will be almost $1 trillion greater at $2.47
trillion to $1.51 trillion for Obama. It doesn’t look like Trump’s tax cuts
will pay for themselves.

The US under Trump will add about the same amount to the nation debt in 4
years as Obama did in 8 and Obama inherited the "great recession"

[https://www.whitehouse.gov/wp-
content/uploads/2020/02/budget...](https://www.whitehouse.gov/wp-
content/uploads/2020/02/budget_fy21.pdf)

For those of you who like to dive into the numbers

[https://www.bea.gov/sites/default/files/2020-07/tech2q20_adv...](https://www.bea.gov/sites/default/files/2020-07/tech2q20_adv.pdf)

From Bloomberg:

\- Some categories actually added to GDP: consumer spending on cars,
recreational goods, housing and utilities (as people worked from home and ran
air conditioners longer?), and financial services and insurance.

\- Other categories in positive territory: information processing equipment at
companies (all other categories detracted from GDP), net exports, and
government spending.

\- China has only bought about 23% of its promised purchases for the year from
the phase 1 trade deal so we probably can't look to China to buy the US out of
its depression

~~~
seneca
> When you compare the last three years of Obama’s Presidency vs. Trump’s
> first three years

If you remove the pointless politicking, this is a very informative comment.
Thanks for putting all that data together. It seems strange to lay out the
completely unprecedented context, then proceed to ignore it in order to make a
political claim though.

~~~
kerkeslager
Facts aren't political. They're just reality.

If you feel that facts reflect poorly upon your political position, that
sounds like something you should address.

And to be clear: the statements you're quoting _specifically exclude_ the
pandemic, so I'm not sure what you feel is "the completely unprecedented
context" here.

------
sp332
Please add "Annualized Rate" to the title.

~~~
ethbro
@dang Seems like an accurate and fair update

~~~
detaro
just mentioning his name doesn't do anything. The mod e-mail address is in the
page footer if you want to reach him.

~~~
FabHK
Thanks, didn't know that - they often respond so promptly that I actually
thought the invocation of the name or "mods" triggered some sort of
notification..

~~~
detaro
Yeah, I wouldn't know either if I didn't remember him saying that there isn't
actually a running keyword search for it. It'd be interesting to know what
percentage of all HN comments he reads...

------
JumpCrisscross
GDP is a flow statistic, though we often discuss it as a stock. (Cash in the
bank is a stock statistic. Cash inflows is a flow. Amount of stuff versus
delta.)

It's difficult to compare this quarter to those in 1918, given the dramatic
differences in the composition of the economies and statistical methods. But a
~10% reduction in flows doesn't strike me as _that_ bad to the country's long-
term potential.

The assets are mostly still there. And nobody is forgetting how to do their
job in 3 to 6 months, though productivity in some sectors will take a hit from
the changes.

------
aazaa
> Congress has approved trillions of dollars in stimulus to help U.S.
> households and businesses get through the pandemic, and another package is
> now being negotiated on Capitol Hill. One key component—an extra $600 in
> weekly jobless benefits—is due to expire at the end of July, but lawmakers
> are still discussing whether and how to extend the aid.

This is the part that isn't getting enough attention. That "stimulus" came in
the form of treasury bonds. Those bonds need to be bought by... someone.

Foreign central banks stopped net buying US treasuries a few years ago. At the
same time, gold holdings by central banks have climbed. The world outside the
US is thumbing its nose at US federal debt as a reserve asset.

Without deep-pocket buyers, the interest rate on US debt will rise, and
continue rising until a suitably-high interest rate can be found to justify
the risk of loss.

So the Fed has stepped into the void and bought the treasuries in
unprecedented quantities:

[https://fred.stlouisfed.org/series/WALCL](https://fred.stlouisfed.org/series/WALCL)

It turns out even this isn't enough to soak up all the debt being issued.
Regulations have been relaxed so that banks can claim treasury holdings as
reserves. The Fed has deputized banks as holders of US debt.

[https://www.federalreserve.gov/newsevents/pressreleases/bcre...](https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200515a.htm)

This sets up a situation in which US treasury yields simply can't be allowed
to spike because if that happened:

1\. banks would suffer capital losses

2\. the US government would become unable to sustain interest payments on new
debt. That means forced cuts to entitlements and even the military.

Clearly, this would spell disaster. So it's not going to happen. The Fed will
keep buying and buying and buying. If need be, regulations will be changed to
allow the Fed to buy things it has never been able to buy before. Like US
stocks.

The party can never, ever end. The balance sheet expansion will continue until
some factor emerges that causes more pain as the balance sheet expands. I'm
not sure what that factor could be, but it would come as a very big shock.

For clues regarding the limit of Fed money printing, look to the enormous
asset bubble that's developing in US stocks. The more the balance sheet
expands, the bigger this bubble gets. And for the foreseeable future, the Fed
can't stop printing.

What breaks first?

~~~
mrep
Japans central bank has 3 times the asset sheet to gdp ratio that we do. I
think we got a while before anything breaks.

~~~
simonh
The Japanese fiscal hole was way, way too deep a long time before it got as
bad as it is now.

------
JanSt
Was the US lockdown so hard? I thought Europe locked down much more and the
contractions there were in the 6-13% range.

~~~
detaro
You're probably comparing Q2 numbers of 6-13% to the annualized rate from the
headline (which is based on a 9.5% contraction in Q2)?

~~~
makomk
Yeah, as I understand it reporting quartaly economic changes in annualized
terms is an Americanism that isn't generally done in Europe, so you have to be
very careful when comparing figures.

------
Havoc
Stockmarket fine though. What a joke.

~~~
londons_explore
The stockmarket is denominated in US dollars... Investors see two possible
futures:

1\. Economy is fine, their stocks end up growing in $$$ terms. Hence high
price.

2\. Economy tanks, US prints new dollars to pay off loans, US dollar loses
lots of its value, but because the company stocks are denominated in dollars,
the stocks are still worth a lot of dollars.

~~~
MrPowers
This is an overly simplistic view in my opinion. #1 assumes a strong
relationship between the stock market and the overall economy which hasn't
been true in recent years (corporate profits are growing way faster than the
economy). #2 assumes that the Fed printing money will decrease the value of
the dollar, which it might, but in the last 10 years, the Fed has greatly
increased the money supply and the dollar has strengthened a lot.

It's best to use terms like the Fed, the US government and US corporations
rather than "the US". They're all different.

The possible scenarios investors see are much more varied and nuanced than the
two options you've outlined.

~~~
voidmain0001
From option 1, are corporate profits up because of expanded share buyback
operations of those corporations? In the current economic downturn buyback-ing
seems to be the way to show earnings to shareholders...

~~~
MrPowers
I was referring to net corporate profits (revenue minus expenses) which aren't
impacted by share buybacks. Share buybacks reduce the number of shares
outstanding and increase the earnings per share, but don't impact net income.

------
LatteLazy
These numbers are not useful. We need to know if the economy will spring back
when we reopen, not if it closed when we closed it. Picking this number
because it's the closest thing we have to a useful number doesn't make it
useful.

~~~
chasd00
Not sure why the parent was modded down, they're exactly right. This is not
normal times, all bets are off. Current economic numbers have no relevance to
the past nor the future.

edit: It will be interesting if Biden is elected and then a vaccine comes out,
the economy rebounds, will he take credit? I would expect him to as would any
other politician would but, man, Trump's twitter rage will be epic.

~~~
LatteLazy
I don't want to push the metaphor too far, but...

Every night most of us go to sleep between 11pm and 6am. National economic
output drops around 90%. Massive disaster, recession, depression level issues.
And no one bats an eye lid. Because there is a good reason for this and
everyone will wake up in the next 7 hours and go back to work.

This is that but for 7 months instead of 7 hours.

The question everyone should care about is "Will we wake up, when and how many
companies will have died in their sleep?" Not "How much work are companies
doing while they sleep?".

Those two numbers are barely related IMHO. In fact, the safer we make it to
sleep, the less activity we will see now BUT the more we will see in a few
months, years etc.

~~~
makomk
The length of the interval matters. Everyone's heart pauses for a second or so
tens of thousands of times a day, but if your heart pauses for an hour you're
dead. The economy is a lot like your blood circulation - it relies on a
continuous flow of money in order for businesses to keep on running and
providing people with stuff, and the longer it's shut down for the worse we
can probably expect the damage to be.

------
partingshots
Not bad, the market was pricing in expectations of a 34.7% contraction.

------
mytailorisrich
Monthly and quaterly figures are bound to show the largest drop.

For annual figures, a first approximation is that a month is worth 1/12th of
the annual output so I would expect a 8.3% drop for every month that the
economy is completely stopped.

34% contraction for a quarter means that the economy essentially stopped for a
whole month, and would lead to a 8% contraction for 2020, everything else
being equal. But we're not through yet...

~~~
coldpie
> I would expect 8.3% drop for every month that the economy is completely
> stopped

Yeah. Everyone knew this was going to be bad, which is why the experts were
saying we need to get it under control quickly and figure out how to safely
operate while the pandemic is in effect. But 2016 happened, so instead we get
months and months of lockdown and the accompanying economic devastation.

~~~
atemerev
The "experts" are saying many different things. Currently, the new situation
is being analyzed, but it seems that even pervasive non-pharmaceutical
interventions (masks obligatory in all closed spaces, ban on public events,
etc) are still not enough to keep Rt below 1.0 and "get it under control" (see
the second wave effects in Europe). Lockdowns seemed to work, but economically
unsustainable. As of now, there is no clear answer about how to proceed.

And that's before the epic blame game even started. Boy, that would be
interesting to watch.

~~~
rorykoehler
Masks would work if everybody wore them

~~~
glofish
the problem is that masks have a minor effect at best thus in no way represent
the solution so many seek

~~~
atemerev
Not “a minor effect”, they seem to improve Rt more or less significantly
(according to preliminary studies). But they are probably not enough on their
own.

------
binarymax
Has anyone in currency exchange noticed signals of inflation? I track GBP=>USD
and even in a post-Brexit COVID economy the rate changed from 1.23 in April to
a peak of 1.30 on Tuesday. This really looks like inflation to me, but I'm not
an expert.

------
amiga_500
Give me just a little more time, and our love will surely grow. Election
delay!

[https://www.bbc.co.uk/news/amp/world-us-
canada-53597975](https://www.bbc.co.uk/news/amp/world-us-canada-53597975)

