- [Narrator] There's one big economic indicator
that economists pay attention to when figuring out
if the country is in a recession.
- 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)