GDP Growth From a Year Earlier - Down 2.9% In Spite of a Tripling of the Deficit to $3 Trillion

Tuesday I posted that today's GDP growth would seem incredibly high but that it was important to compare to a year earlier rather than last quarter. We are down about 3% from a year ago and given that before the pandemic the economy was expected to grow 2%, this means that current GDP is about 5% below its trend line. If the economy were to stabilize at this level, it would mean that GDP will have shrunk $1.1 trillion.

(Is $1.1 trillion a lot? 47 states have GDP lower than $1.1 trillion. A drop of $1.1 trillion is the same as if the 15 states with the smallest GDPs simultaneously had their economies collapse to zero.)

Jason Furman posted data on how much GDP had dropped in the worst year of the last 6 recessions (including this one for Q3 of 2020).

1975-Q1: -2.3%
1982-Q3: -2.6%
1991-Q1: -1.0%
2001-Q4: +0.2%
2009-Q2: -3.9%
2020-Q3: -2.9%

Also of note: the purchase of goods has more than recovered (the green line below) but the purchase of services (the blue line) is still far below its trend. What does this mean in simple terms? I was talking to a co-worker today. He just bought a new motorcycle, which is a good. He's also eating out far less than a year ago, so less work for the wait staff who provide services. Purchase of goods up; purchase of services down.

Probably the biggest takeaway though? We've recovered in part because we're learning how to buy, sell, and work in a pandemic and in part because we have run a monster deficit this year. Last year we ran a deficit of nearly $1 trillion; this year the deficit was more than $3 trillion. Congress ended its session last week without passing a stimulus package. Expect GDP to drop again this and / or next quarter because of that failure. Without an extra $2 trillion of government spending on top of the $1 trillion pre-COVID deficit, GDP would not have grown 33% at an annualized rate this last quarter. Without stimulus spending, the economy would have continued to fall. If we don't get another round of stimulus spending, you may see what I mean.