Post #857: Getting ready for a hard winter, part 1.

Posted on October 9, 2020

At some point in the recent past, you probably saw some monster headline about the huge plunge in US Gross Domestic Product, due to COVID-19.  Like the one at the left.  (Source:  CNBC).

That, in turn, was based on the numbers as calculated by Bureau of Economic Analysis.  When graphed, they looked like this.  (Source:  BEA.)


In this post, I’m going to explain why that’s hugely misleading, as presented.  (Hint:  They took the actual drop, and multiplied by four).  And then look at other sources of national data, to get a handle on the average impact of COVID on the economy as a whole.  So far. 

The picture isn’t sunny.  But it’s not (yet) the disaster that is (or, really, appears to be) pictured above.

Let’s cut to the chase:  The actual year-to-year change in GDP in the second quarter of 2020 was -8.5 percent.  The numbers below are estimates of quarterly US GDP, where the quarterly data are “annualized” (in effect, multiplied by four).  The actual percent change between those two circled figures is as stated, -8.5%.

Source:  U.S. Bureau of Economic Analysis, “Table 1.1.5. Gross Domestic Product”, at this link, accessed 10/9/2020.

I completely understand why the BEA multiplies the numbers by four, in the table above.  They are trying to show you a projection of GDP for the year, based on the most recent quarter.  I can even guess why they take the quarter-to-quarter percent change and multiply by four, when they report that information.  (So that, e.g., if there was no change in GDP from now on, you’d average that 32% “plunge” with three zeros, and come up with the correct year-upon-year figure of 8%).

But, in hindsight, reporting that ~8+% actual reduction, year-on-year, as a ~32% plunge, was not a good choice.  It may be tradition, and in more normal times it might (or might not) make sense.  In the current context, it’s nonsensical to do it that way.

Federal tax receipts are a reasonable way to get a grip on what has happened to the US economy as a whole since the start of the pandemic.  And can give us some clue as to what has occurred since the second quarter of 2020.

For the entire fiscal year, tax receipts fell just one percent.  But for the COVID-19 portion of the fiscal year (April – September), Federal tax receipts were down about seven percent, which can be calculated from the table below:

Source:  US Congressional Budget Office, September 2020 monthly budget review.

And so that looks like we’ve recovered a bit, from that initial 8.5% decline in GDP in the second quarter of 2020.

Finally, there are also fairly current data on “personal income”, which includes not only earned income, but things like stimulus payments, and so on.  Interestingly, person income in August 2020 was about 5% higher than it was a year ago, per the Federal Reserve Bank of St. Louis.

How can GDP and federal tax receipts be down, but personal income is up?  There’s no magic involved.  Just debt.

The economy continues to roll along mainly because the Federal government is borrowing money and transferring it to businesses and people.  Like so:

The preliminary numbers are now available for the full Federal fiscal year (Oct 2019-Sept 2020.  According to the Congressional Budget Office (CBO) Monthly Budget Review for September 2020 (emphasis mine):

Relative to the size of the economy, the deficit—at an estimated 15.2 percent of gross domestic product (GDP)—was the largest since 1945,

So far, the economic story here or abroad hasn’t been one of either bankruptcy or debasement of the currency.  Instead, as a nation, we’re taking a line from “16 Tons“:   Another day older and deeper in debt.

In post #783, I expressed my amazement that three-quarters of Republicans thought the economy was fine.  Apparently, not realizing or not caring that, of late, about one dollar in five, spent in the US economy, was borrowed by the Federal government, the largest-ever expansion of Federal debt in the history of the U.S.

And, as far as I can tell, that’s where things now stand.  US GDP is down maybe 7% or so.  But that’s only at a cost of massive Federal borrowings.

And, of course, that reduction is spread hugely unevenly.  Anyone with a place of business or employment that requires crowds to gather inside is probably hurting these days.  But on average, things aren’t really horrifically bad.  For sure, they aren’t 32%-decline bad.  We just need to keep it together until next spring, when we ought to be getting significant shipments of an effective vaccine.  Until then, we just have to make it through what is likely to be a long, cold winter.  And then figure out how we’re going to pay for all of this.