The trillion-dollar question: How far will GDP fall?

“Bad” doesn’t even begin to tell the full story.

And yet “bad” is the conclusion every economist reaches when they run the numbers on the second quarter. The “Great Cessation” will result in a hit to the U.S. economy unlike any ever seen. All we’re left to argue over is whether the eventual recovery will be V-shaped (a quick, sharp rebound), U-shaped (a more protracted turnaround), or the dreaded, L-shaped (a bottom with no recovery) variety. Everyone who has ventured a prediction on GDP is starting from the same equation. It will be familiar to anyone who took “Intro to Macroeconomics” in college: GDP=C + I + G + (X – M). 

The most important part of that equation is C: In 2019, consumption, the engine, accounted for 68% of U.S. GDP. Of that, services—paying for a doctor’s visit, hiring a management consultant, or booking a cruise ship vacation—is a massive part, representing 47% of the $21 trillion economy. Purchases of durable goods (think autos, laptops) and non-durable goods (food, clothes, shampoo) make up the rest, or 21% of the U.S. economy. 

“You’ve probably cut back on consumption of discretionary goods—automobiles, household appliances, luxury items, building materials, consumer electronics. All those things add up, and they’re falling pretty sharply. Some of them are falling out of bed,” explains Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets.  

Drilling down on the Services numbers, Goldman Sachs calculates a 90% decline in sports and entertainment spending in April, and 75% falls in spending on public transportation and food services, which includes restaurants. Also, they predict a 65% drop in hotel bookings. About the only sector of consumption that could actually grow is healthcare spending, which Goldman sees climbing 1.6%. 

So, with Goldman, Bank of America, Deutsche Bank and NatWest each estimating at least a 30% Q2 plunge, it’s safe to say consumer spending will fall by roughly  $450 billion over the next three months. 

“I” or business investment, meanwhile, accounts for 17% of GDP. (With C+I, we’re already at 85% of the U.S. economy). It includes everything from factories, manufacturing equipment, IP investments and inventory turnover. U.S. manufacturers account for 11.4% of economic output, and they’re hurting. According to the Institute for Supply Management, every facet of its manufacturing index—from new orders to employment to prices—shrunk in March. No surprise there as factories across the country, including those run by Boeing, America’s biggest manufacturer, plus the auto majors, shut down. April is expected to be even worse. Goldman forecasts a 35% decline in overall manufacturing activity—with the biggest hits to automobiles and parts suppliers.

Which brings us to one area of the equation expected to grow: G, for government spending. But that’s tricky. You’d think a $2.2 trillion stimulus bill and the hundreds of billions the Federal Reserve is pumping into the financial system would lift GDP. Technically, most of that is defined as transfer payments, which, by definition, don’t add to G. In the CARES Act, as it’s called, the government is committing up to $16 billion on the purchase of vital medical gear—which would lift GDP—though it’s a sum that’s unlikely to make much of a difference on the overall number—or for America’s frontline doctors and nurses, for that matter. 

Coronavirus has devastated global trade, which means imports and exports will both crash. The U.S has run a trade deficit for years, a persistent drag on GDP. The net exports (X-M) tally will actually worsen in 2020, Goldman says. Imports, aided by a strong dollar, will outpace exports by roughly $190 billion this quarter alone, it forecasts.

There is no tried and true mathematical formula for pandemic economics. Economists say they’ll watch weekly jobless claims figures, and recalibrate forecasts. From there, some will be working off a model that adapts Okun’s law, named after the American economist Arthur Okun who first posited that for every 1% rise in the unemployment rate, you get a 2% fall in GDP. 

That might be too extreme a calculus these days. The CARES Act, for one, is meant to blunt the economic destruction of mass unemployment posed by the coronavirus in the short term. Goldman reckons a better measure is a modified Okun—the “half-Okun,” if you will—that suggests a 1:1 correlation between rising unemployment and falling GDP. 

But even the half-Okun paints a frightening picture. With consensus GDP expectations topping negative-30, that would portend Depression-era jobless numbers. Sure enough, the St. Louis Fed ventured the unemployment rate could hit as high as 42%. Now that would be bad.

A version of this article appears in the May 2020 issue of Fortune with the headline “How far will GDP fall?”

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