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  • - [Narrator] There's one big economic indicator

  • that economists pay attention to when figuring out

  • if the country is in a recession.

  • - GDP. - GDP.

  • - GDP. - GDP.

  • - [Journalist] GDP.

  • - [Host] Gross domestic product is our biggest measure,

  • most important measure.

  • - [Narrator] The current economic slowdown

  • caused by the coronavirus crisis has many worried

  • that the United States has entered into a recession.

  • U.S. GDP shrank by a 4.8% annual rate

  • in the first quarter of 2020.

  • It's the largest contraction of GDP

  • since the last recession,

  • and ends the longest economic expansion on record.

  • Here's what GDP is and why it's a key measurement

  • to determine whether the country is in a recession.

  • This is the formula the government uses to calculate GDP.

  • It tallies all the goods and services produced in the U.S.

  • From the dinners we serve at restaurants,

  • to the cars we produce in factories,

  • and the flights we take from airports.

  • According to the Commerce Department, the United States

  • produced over $21 trillion worth of goods

  • and services in 2019.

  • - Because GDP is a measure of the entire economy

  • and aims to capture almost everything that's happening

  • in an economy, economists have chosen the broad definition

  • of a recession as two consecutive quarters

  • of negative growth.

  • - [Narrator] To calculate GDP,

  • economists first calculate consumer spending,

  • or the day-to-day purchases that everyday Americans make.

  • Consumer spending makes up about 68% of GDP.

  • - And that share has got bigger over time,

  • as the U.S. manufacturing industry has got smaller.

  • - [Narrator] Consumer spending fell seven 1/2% in March,

  • as business shutdown and government stay-at-home orders

  • came into effect.

  • - Americans have continued to spend online.

  • But what they've bought online and had delivered

  • to their homes hasn't compensated for the loss

  • of other activities since the pandemic started.

  • - [Narrator] Another major component of GDP

  • is business investment.

  • This includes things like companies building factories

  • or buying machinery.

  • - That's important to the economy

  • not only because of the activity it produces,

  • but also because business investment

  • produces productivity gains.

  • For instance, by making factories more efficient

  • or enabling the energy industry to extract more oil and gas.

  • - [Narrator] Business investment was on the decline

  • before the outbreak,

  • and has continued since lockdowns began.

  • - And there are really two main reasons for that.

  • The first was the trade war between the U.S. and China

  • that created a lot of uncertainty for businesses

  • and their investment plans.

  • And the other were oil prices.

  • Low oil prices were definitely a deterrent

  • for U.S. energy companies to invest in structures,

  • and new drills, and new wells.

  • - [Narrator] Government spending also contributes to GDP.

  • The U.S. government spends money on everything

  • from equipment for the military

  • to government employee payrolls.

  • And government spending has continued to rise

  • through the first quarter of 2020.

  • - And it's going to increase a lot more

  • in the quarters ahead.

  • And that's because of the multi-trillion dollar

  • stimulus packages that Congress has passed

  • to help stimulate the economy out of its current downturn.

  • - [Narrator] GDP also adds everything the U.S. exports

  • and subtracts everything it imports

  • to calculate net exports.

  • The United States has been importing more

  • than it's exported for several decades.

  • In the first quarter of 2020, net exports rose,

  • meaning there was a slight narrowing in the trade deficit.

  • - [Harriet] Normally that would be a good thing

  • because it means that the U.S. is importing less.

  • However, what we've been seeing

  • is that actually both imports and exports have been falling.

  • It's just that imports have been falling more than exports.

  • This is not necessarily a good thing

  • because it shows that demand is very weak.

  • - [Narrator] Forecasters expect a much larger contraction

  • of GDP in the second quarter,

  • producing the two consecutive quarters of decline

  • that define a recession.

  • - [Harriet] Lots of economists are predicting declines

  • of about 30% or more.

  • That is a huge number.

  • It is off the scale compared to what we've seen

  • in even in recent recessions.

  • On the other hand, the hopeful scenario

  • is that we see this big drop in the second quarter,

  • and then the economy might start to recover.

  • (gentle music)

- [Narrator] There's one big economic indicator

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How GDP Tells Us if We're in a Recession | WSJ

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    Mackenzie posted on 2020/05/28
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