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COMMENTARY

The economy cratered as never before in April. What comes next is hard to say

The second quarter set a modern record for the biggest pullback in business activity

New Yorkers in need received free produce, dry goods, and meat at a Food Bank For New York City distribution event at Barclays Center on Thursday.
New Yorkers in need received free produce, dry goods, and meat at a Food Bank For New York City distribution event at Barclays Center on Thursday.Michael Loccisano/Getty Images for Food Bank For New York City

The Commerce Department made it official Thursday: Shutting down the country in a desperate bid to slow the spread of the coronavirus pandemic sent the US economy into its steepest nose dive since modern record keeping began in 1947.

We already knew the economic landscape resembled Mordor or Hoth (pick your pop-culture analogy) a few months ago. That’s the problem with the government’s quarterly report on gross domestic product. It tells us a lot about where we’ve been but much less about where we are going.

But this is one of those moments for the history books, a time when it’s prudent to let what happened really sink in, to better understand the challenges ahead, even if it feels like we’re gawking at a fatal car crash.

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GDP — the value of all products produced and all services rendered — plunged 9.5 percent in the second quarter, a decline of $1.8 trillion from the first three months of the year. The reversal is all the more remarkable because most of it occurred in April, with activity rebounding in May and June as states began to reopen.

American consumers, whose purchases power about two-thirds of the economy, reduced spending by 10 percent, led by cuts in health care services, which usually hold up better than other sectors during a recession. Mostly housebound, consumers also spent far less on clothing, eating out, entertainment, and recreation.

It follows that that reduced spending translated into larger savings than normal — $4.7 trillion vs. $1.6 trillion from January through March. A big chunk of that cash should flow back into the economy in the future, but there is a serious caveat: We need to get the pandemic under control and millions of people back to work before things get appreciably better.

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Also driving the decline in GDP were lower exports, higher imports, and less spending by state and local governments, which was partially offset by more federal spending, including stimulus money. Without those rescue funds, the economy would have fallen even harder.

A lot of attention is focusing on a far more dire-looking GDP stat: minus 32.9 percent, or the drop during the quarter presented on an annualized basis.

This number assumes the losses we saw in April through June will be exactly the same for three more quarters, like “Groundhog Day” with Fed chairman Jerome Powell playing Bill Murray. While multiplying one quarter’s result by four (and factoring in compounding) helps when making historical comparisons, the economy didn’t really shrink by one-third in the second quarter.

In Massachusetts, the economy fell at a 43.8 percent annualized rate, according to MassBenchmarks, a collaboration between the University of Massachusetts Donahue Institute and the Federal Reserve Bank of Boston. Massachusetts and other states in the Northeast were hammered harder by COVID-19 than the rest of the country because they shut down earlier and reopened at a more cautious pace, MassBenchmarks said.

The economy began to retreat in February, according to the National Bureau of Economic Research, or NBER, the official arbiter of such things. GDP has declined for two straight quarters, which is a common definition for a recession.

But even with unemployment at a post-1930s high of 11.1 percent (17.4 percent in Massachusetts), most economists would say we are not in a depression, which doesn’t have a precise definition.

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NBER says the term depression often refers to “a particularly severe period of economic weakness.” While that sounds a lot like where we are today, duration is also a factor.

The dollar value of GDP, when seasonally adjusted, is back to the level of the second quarter of 2017. If we bumped along the bottom for several years, the professionals might declare a depression.

Of course, if you are out of work and struggling to get by, the distinction is meaningless.

The second-quarter GDP is a snapshot of the economy through the end of April. Most economists believe the economy started expanding again about that time or shortly after.

They drew that conclusion from other government data, such as retail sales and hiring, and private data that track measures such as credit card spending, job postings, hours worked, and small-business closings.

Most of these data showed a robust rebound through May and June. That led some forecasters to predict a V-shaped recovery, with the economy quickly climbing out of a deep hole.

But that rally hit a wall in July, when a surge of coronavirus cases in many states resulted in a pullback by consumers. Layoffs, which had been moderating, are now ticking up, with new claims for unemployment benefits rising for a second straight week last week and exceeding more than 1 million for 19 weeks in a row. More than 30 million people remain out of work.

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Forecasters aren’t quite sure what comes next. The economy could start shrinking again, especially if there is a second big second wave of coronavirus infections. Or the recovery could continue, but with a frustratingly slow climb back to pre-pandemic levels.

Here’s another possibility: The recovery doesn’t treat everyone equally. For people with secure jobs, whose companies are positioned to do OK despite the pandemic, things get better. For people who work in industries that have been battered by the pandemic — restaurants and bars, travel and tourism, gyms, entertainment venues, etc. — things get worse.

Call it a K recovery.





Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.