The Latest on GDP: Two Years of Economic Growth Wiped Out

By SBE Council at 28 January, 2021, 1:46 pm

by Raymond J. Keating-

The latest reportfrom the U.S. Bureau of Economic Analysis offers the initial estimate on real GDP (gross domestic product, or the value of the goods and services produced less the value of the goods and services used up in production) for the fourth quarter and all of 2020. The data put in perspective how much damage has been inflicted due to the pandemic and related decisions, and how deep of a hole from which U.S. entrepreneurs, businesses, workers and consumers need to climb out.

Keep in mind that unless otherwise noted, the numbers cited here are real (that is, inflation adjusted) and are seasonally adjusted and annualized. Also, looking at the 2020 totals can help to put the state of our economy in better perspective, as opposed to the wild swings in annualized data for each quarter.

First, after plunging by 5.0 percent in the first quarter 2020 and by 31.4 percent in the second quarter - GDP grew in the third and fourth quarters.

Real growth came in at 4.0 growth in the fourth quarter, after a jump of 33.4 percent in the third quarter.

Second, for all of 2020, real GDP declined by 3.5 percent. That was the largest decline in real annual GDP in the post-World-War-II era.

Third, in effect, two years of real economic growth have been wiped out.

For example, real GDP (in 2012 dollars) in the fourth quarter of 2020 was estimated at $18.8 trillion, which was the same level as in the fourth quarter of 2018. Or, for all of 2020, real GDP came in at $18.4 trillion, which was down a bit from the $18.7 trillion registered for 2018.

Source: Federal Reserve Bank of St. Louis, FRED

Fourth, real business investment (i.e., fixed nonresidential investment), like the overall economy, bounced back with two quarters of growth after big declines in the first two quarters. Real growth of -6.7 percent in the first quarter 2020 and -27.2 percent in the second quarter were followed by +22.9 percent in the third and +13.8 percent in the fourth.

Fifth, for all of 2020, real growth in business investment came in at an estimated -4.0 percent. That was the largest decline since 2009.

Sixth, like the overall economy, some two years of growth in real business investment have been wiped out. For example, the fourth quarter 2020 level of real fixed nonresidential investment stood at the same level as was the case in the fourth quarter 2018, and the overall amount for 2020 came in just below the 2018 level.

Seventh, residential investment (i.e., housing) remains the standout for this economy. Real residential investment grew in the first quarter of 2020 by 19.0 percent, declined by 35.6 percent in the second, and then bounced back with growth rates of 63.0 percent in the third quarter and 33.5 percent in the fourth quarter 2020.

Eighth, for all of 2020, real residential investment actually grew by 5.9 percent. Along with intellectual property products investment (+1.9 percent), these were the only major areas of private investment growth in the 2020 GDP data.

Ninth, trade was brutalized in 2020. After real export declines of 9.5 percent in the first quarter 2020 and 64.4 percent in the second quarter, growth resumed, increasing by 59.6 percent in the third quarter and 22.0 percent in the fourth. Similarly, real imports dropped by 15 percent in the first quarter and by 54.1 percent in the second, following by growth of 110.2 percent in the third and 30.8 percent in the fourth.

Tenth, for all of 2020, real exports declined by 13.0 percent. That was the largest drop off since 1958. And the 2020 drop in real imports of 9.3 percent was the biggest since 2009.

Eleventh, the 2020 level of real U.S. exports came in at just below the level registered in 2013. So, the U.S. has experienced no growth in real exports in seven years. As for 2020 imports, that level stood at about the same as in 2016.

Twelfth, and finally, let's take a quick look at real personal consumption expenditures. Real consumption also has seen two years of growth wiped out. However, spending on goods has held up relatively well (even with a 0.4 percent decline in the fourth quarter 2020), as spending on goods actually grew in 2020 by 3.9 percent.

It has been spending on services that has been devastated. For all of 2020, consumption of services declined by a real rate of 7.3 percent. That was the biggest drop off on record going back to 1930. And the level of real personal consumption expenditures on services in the fourth quarter 2020 stood at the same level as about the first quarter 2016.

The fact that the U.S. economy has shown two quarters of growth after two quarters of large declines is encouraging. But COVID-19 has put us in a deep hole, and it will take plenty of entrepreneurial activity, innovation, private investment, expanding opportunities at home and across borders, and hard work to get out, along with smart policymaking that encourages, rather than raises the costs of entrepreneurship, investment, business growth, trade, and hiring.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.