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Measuring the Impact of Covid-19 on the US Economy

 

  • How does consumption demand affect GDP and personal income in the US?
  • Which industries are affected most from the underlying shift in demand due to Coronavirus pandemic?   

 

United States Bureau of Economic Analysis (BEA) reported first quarter Q1-2020 GDP decline of 4.8% on an annualized basis. It is one of the biggest falls in GDP numbers and the worst quarterly contraction since the Great Depression of 2008-09. Furthermore, as per some economists, the second quarter GDP is expected to be substantially worse, as the first quarter decline does not fully capture the economic carnage that the pandemic has brought upon the US economy. Note that the US Government announced “Stay-at-home” order during late March, which makes first quarter GDP hit by COVID-19 for only one month.

The leading factor for the decline in GDP was the downward spiral in (a) Personal Consumption Expenditure (PCE), which is the bedrock of US economy and contributes around ~70% annually. The remaining contributors are (b) Gross Private Investment (Capital Expenditure by Company/Individuals for Buildings, Machinery, Intellectual Property and Residential Property) with contribution of ~17%, (c) Net Exports of around -4% and (d) Government Consumption Expenditures & Gross Investment of ~18%.

Since, PCE which fell 7.6% during Q1-2020 from Q4-2019 (largest ever decline in its history) and has the most weightage in US GDP, this blog will be focused more on its cause and effects on the US economy. PCE is composed of two main components: Goods consumption and Services consumption among the general population.

The demand for goods consumption declined marginally by 1.3%, however, it is further subdivided into durables and non-durables category. Durable goods (including; automobiles, household equipment, furnishings & other durables) saw significant decline of 16.1% over the last quarter due to the closure of US economy and deferment of purchases of automobiles and other durable household goods by consumers due to uncertainty in economic environment as well as household income; although, this was marginally compensated by growth of 6.9% in demand for non-durable goods, which includes food & beverages, clothing & footwear, fuel and other nondurable goods. However, within non-durable goods category, food & beverages saw the maximum growth of around 25% on an annual basis, led by panic buying of food supplies and other household consumables (~13%), emptying the shelves of supermarkets on account of fear of shortages. Apparels and fuel witnessed a huge drop of 36% and 5.5% respectively.

 

 

The demand for services witnessed a massive decline of 10.2% due to closure of almost all outdoor activities, leading to a rapid change in demand. Within services, which is divided into various sub-categories: outdoor food & accommodation, recreation and transportation services each saw a demand slump of around 30% on an annualized basis. Ironically demand for healthcare services also declined 18% in the wake of such pandemic, mainly due to fear of spread of contamination and also by diversion of physicians towards Corona positive patients. Financial services & insurance grew ~3% and housing & utilities saw a marginal growth of less than 1%.

Demand slump in economy has a direct impact on the Personal Income (PI) and the latter declined in response with the former, leading to a large drop of USD 382.1 Billion (-2.0%) in March against previous month, as people deferred and cutoff unnecessary expenses. This also led to a decline in real per capita disposable income (DPI) by 1.8% over the previous month. Within PE, a large decline was witnessed in total salaries and wages of USD 296 Billion (-3.1%) due to layoffs. This is also reflected in a sharp increase of unemployment insurance receipts (component of PE), which registered a record increase of ~150% over the previous month. Furthermore, the unemployment rate has touched 14.7% in April and a staggering 33 million of Americans have filed for the first-time unemployment benefits, since the pandemic took hold.

The Consumer Financial Protection Bureau (CFPB) data highlights worrying trends in the credit enquiries, which shows that the fresh credit enquiries for auto loans, new mortgage and revolving credit card dropped by 52%, 27% and 40% respectively between the first and last week of March. This resulted in drying up of fresh credit flows, which is the lifeblood of any economy and is visible in consumer credit flows (which records flow of fresh credit towards consumers’ purchase of goods and services along with credit cards, student loans, house/property and automobiles) decline of ~160% in the month of March on a monthly basis and ~200% on an annual basis. The sharp drop in consumer credit flows is close to the decline seen during the Great Depression of 2008-09, however, it has not breached the previous level yet.

In its wake, the Coronavirus pandemic has brought health hazard, ensuing economic turmoil on the entire world economy. As the total number of Coronavirus cases rise further in the US, (as of this writing, positive Coronavirus patients crossed 1.5 million and the death tally has crossed 90,900), the anticipation of a recovery slims down further, because it makes people cautious and scale back on their spending. With a decreasing propensity to spend among consumers, the economy starts to plummet, thus creating a negative feedback loop. So, to overcome the current economic crisis, governments all over the world are announcing stimulus packages of billions of dollars to kickstart growth and protect its people from falling into poverty and the US Government had also announced a USD 2.2 Trillion Coronavirus relief package in March, under which USD 1,200 will be distributed to each eligible citizen.

Furthermore, the US is also planning a second, bigger, relief package of USD 3 Trillion, which will provide another round of USD 1,200 to each citizen and unemployment benefits of USD 600 per week, on top of the previous one. The rising federal spending in the form of relief packages has its own set of critics, led by high fiscal deficit, inflationary pressures, and the willingness of people to return to work if they keep receiving aid money. Nonetheless, the US has gone ahead with the first relief package and in almost all likelihood, will announce an even bigger second package, however, only time will tell when will the US economy reverse its downtrend and finally see the much needed growth. 
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