What the terrible GDP numbers mean for the economy : The Indicator from Planet Money This quarter's Gross Domestic Product numbers could be the worst on record. But what do they mean, exactly?
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GDP -32.9%???!!!

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GDP -32.9%???!!!

GDP -32.9%???!!!

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UNIDENTIFIED PERSON, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

STACEY VANEK SMITH, HOST:

Hey, everyone. It is Cardiff and Stacey. And this is THE INDICATOR FROM PLANET MONEY. Today on the show, GDP.

CARDIFF GARCIA, HOST:

GDP stands for gross domestic product, and it's basically a sum total of all of the goods and services that the U.S. economy produces. It's often considered to be the measure of economic growth.

VANEK SMITH: Yeah, GDP includes all of the cars and air conditioners and shoes and haircuts and Uber rides and fish tacos and pedicures that the country is producing and buying.

GARCIA: Yeah, and so a typical GDP growth number is, like, 2% a year or, maybe in a really great year, 3%.

VANEK SMITH: It's like soccer scores. They never - it never gets very high.

GARCIA: Yeah. They stay pretty low, and that's because the U.S. economy is enormous. So even when a lot of things change, the GDP needle just doesn't budge very much.

VANEK SMITH: At least it didn't used to.

GARCIA: That's right. The GDP numbers came out today. And for the months of April, May and June - that's the second quarter - the U.S. economy grew at an annualized rate of negative 32.9%.

VANEK SMITH: That is today's indicator - negative 32.9%. And I have to say, Cardiff, when I saw this number, I was like, our economy shrank by 33%. I mean, that is a third of our entire economy, right? I mean, that can only happen a few times. It was really scary. So I called up Justin Wolfers. He is a professor of economics and public policy at the University of Michigan.

And I was like, wait a minute. Is the U.S. economy, like, one-third smaller? Did we just lose a third of the economy? And so did we lose a third of the economy, Justin?

JUSTIN WOLFERS: No, we did not.

VANEK SMITH: OK. OK.

WOLFERS: It turns out the way that Americans report their GDP statistics is a little more confusing than you might realize. What actually happened is in the second quarter, we produced 9.5% less than we did in the first quarter...

VANEK SMITH: OK.

WOLFERS: ...To - you might think we should report that as a decline in GDP of 9.5%.

VANEK SMITH: Yes.

WOLFERS: What we do instead is we say, if we continue to plummet at that rate for an entire year, at the end of the year, how much lower would GDP be? That's what 32.9% is. It says if the economy kept declining at a rate of 9.5% quarter after quarter after quarter after quarter, four quarters later, our level of output would be 32.9% less. Now, that's unrealistic. This was the worst quarter probably in American history.

GARCIA: So yeah, let's say you do not try to extrapolate out for the whole year. Then what you're looking at is that in April, May and June, the economy shrank by about 9.5% from the first three months of the year.

VANEK SMITH: Which is way better than an economy that shrank at 32.9%. But that number still makes April, May and June the worst three months in the history of the U.S. economy.

GARCIA: That's right. But Justin also is quick to add this GDP report is not like the other ones. We'll explain why right after a quick break.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

VANEK SMITH: In April, May and June, the U.S. economy shrank by 9.5%. It is the biggest drop on record.

GARCIA: Diane Swonk is chief economist at Grant Thornton in Chicago. She says that when she saw the numbers this morning, she was not surprised. She had been making calculations for weeks, and she kind of just knew this was coming. But still, these numbers really hit her hard.

DIANE SWONK: I've literally felt my stomach churn as numbers have come out and felt like I was punched in the gut.

VANEK SMITH: Here is why. Diane says when she sees a number like negative 9.5% GDP growth, she doesn't really see a number. She sees all the things and all of the people behind that number - millions of people losing their jobs, their homes, their businesses.

SWONK: And you can't delineate the economic pain that we've seen. Every single number, every single person that applies for unemployment insurance has a story, and they have a life, a life that's threatening of being destroyed not just by the threat of a virus, but also by the economic devastation it's caused. And we know that economic devastation hurts people's health as well - mental and physical health. So this is a humanitarian crisis the likes of which no one in recent memory has any experience with.

GARCIA: And this is an especially hard moment to see numbers like this, Diane says, because right now, a lot of the economic aid and stimulus that Congress had given the economy back in March is expiring.

VANEK SMITH: For instance, the extra $600 a week that Congress added to unemployment benefits is expiring, and that means millions of people will see their incomes drop in half overnight. Also, the moratorium on some evictions is lifting, which means millions of people could lose their homes all at once.

SWONK: And that's what's so worrisome, especially as we're on the precipice of everything from expanded unemployment benefits expiring to moratoriums on evictions expiring. We could be talking about food insecurity and homelessness that are more akin to the Great Depression than any time in our history.

GARCIA: But there is one big difference between the current economic crisis and the Great Depression, a difference that makes measuring this moment really hard, and that's COVID-19.

VANEK SMITH: Yes. The economic shutdowns across the country have meant that a lot of businesses were forced to close, forced to lay people off. But a lot of that could be temporary. Hopefully, most of those restaurants, hotels, bars, hair salons, clothing stores will open back up, rehire people and start selling stuff again.

GARCIA: And when they do, GDP will go up - probably shoot up because a lot of it will happen all at once really quickly. So Justin Wolfers says the real question he is asking, looking at that negative 9.5%, is how much of it is permanent and how much of it is...

WOLFERS: Directly pandemic-induced.

VANEK SMITH: Temporary.

WOLFERS: It doesn't - it's temporary. We - sure. Yes.

VANEK SMITH: OK.

WOLFERS: It's temporary. It's a temporary downswing. And the question is, do we bounce all the way back to where we were, halfway back, more, less? And that has massive implications for how the subsequent few years play out.

GARCIA: For now, Justin says, our economy is in this kind of suspended animation.

VANEK SMITH: And to really understand what COVID-19 has done to the U.S. economy, we will have to wait until restaurants and hair salons and bars and offices reopen and the virus is under control and we can all start to get back to business.

This episode of THE INDICATOR was produced by Camille Petersen, fact-checked by Brittany Cronin. THE INDICATOR is edited by Paddy Hirsch and is a production of NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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