COVID-19’s Economic Impact: Inflation, GDP, Price Stability, and The Stock Market By: Amelia, Alex, Nick, Peter, Gabi, and Sanket What is Gross Domestic Product (GDP)? ● The total value of all final goods and services produced within a country’s border in a given year ● Four categories (C + I + G + NX) ○ Consumer goods and services (personal consumption by households) ○ Business investment ○ Government spending (excluding transfer payments) ○ Net exports of goods and services Limitations of GDP ● Excludes underground transactions ○ Non-market services ○ Illegal transactions ● Does not account for negative externalities or sustainability ● GDP per capita as a measure for economic well-being ○ Does not account for wealth inequality ○ Does not account for purchasing power ■ PPP (purchasing power parity) Real vs. Nominal GDP ● Nominal GDP (current dollar GDP) ○ Does not account for inflation ○ Can change with a change in price or output ● Real GDP ○ Accounts for inflation- measures the values of goods/services valued at base market prices ○ Should only change if output changes © Statista 2020 Impact of COVID-19 on U.S. Real GDP ● In Q2 of 2020, Real GDP in the U.S. fell by 9.5%, compared to a maximum quarter decline of 2.2% during the Great Recession (Q4 2008) ● Took ~3 years for GDP to reach pre-recession levels during the Great Recession, (GDP does not typically make “V-shaped” recoveries, usually more Source: St. Louis Federal Reserve Bank “U-shaped”) Why has GDP declined so sharply? ● (9.5%) over the second quarter of 2019 → “40% annually” ● Consumers cut back spending and transitioned to less in-store purchasing, more online (fewer jobs needed) ● Lockdowns forced many SMBs to shut down ● 6.2 million unemployed in February to 20.5 million in May ● Retail hit especially hard, major trend of movement to online purchases (fewer jobs needed for this) ○ Major retailers that filed for bankruptcy: Neiman Marcus, Sears, JCPenney ○ Industries that boomed were largely online/digital (i.e. streaming services vs. movie theaters, online retail) → fewer jobs needed What is Stock? ● Represents ownership of a small piece of a company ● Stock is divided into shares that can be purchased by the public for publicly-traded companies ○ Businesses do this to raise money ● Priced based on expectations for future company earnings How do we measure the stock market? ● Made up of exchanges (ex. New York Stock Exchange and Nasdaq) ● Market indexes ○ Track the performance of a group of stocks ● Stock market crash ○ A sudden, severe drop in stocks (a day or a few days) ○ Unanticipated ● Stock market correction ○ Less sudden ○ Short term drop of 10% to 20% from most recent peak ○ Often directs prices to their long term trend The Stock Market Crash of 2020 The Crash: The Recovery: ● Initially ● From February 20th to March 23rd the NASDAQ fell by ○ Stimulus package and FED intervention 37% and the S&P and DOW more than 29% off of ○ People looking beyond economy to what will happen in historical peaks market (swift recovery after shutdown) (looked at China) ● Energy (-47%), Industry and Manufacturing (-32%), Discretionary Spending (-27%) ● Since then ○ Jobs and retail sales have gained momentum ○ Boomed by technology growth (FAANG) Source: https://ourworldindata.org/covid-health-economy CAPIQ Year to Date % Change for Best and Worst Performing Industries Stock Analysis - Amazon (AMZN) ● Amazon (AMZN) up 71.8% YTD ● Growth was strong pre-pandemic, and COVID-19 accelerated the movement towards online retail ● Subsidiaries are a factor in Amazon’s success: ○ Whole Foods - grocery stores have performed well amid the pandemic ○ Amazon Prime Video/Movies - subscription services have taken business from movie theaters ○ Ring - smart doorbell business has skyrocketed (pandemic did not impact this business to a very high degree) Stock Analysis - Clorox (CLX) ● The Clorox Company (CLX) is up 41.2% YTD (owned by Procter & Gamble but operated independently) ● Directly caused by the pandemic, as demand for disinfecting wipes surged ● Growth spike was abnormal considering the stock’s performance over the past 5 years ● Stock price may fluctuate based on vaccine developments Stock Analysis - Hilton Hotels (HLT) ● Declined 21.1% YTD ● Travel bans caused a ~50% drop in the stock’s price in March, when Hilton shut down many hotels in major cities ● Since March the stock has slowly recovered ● How long do you think it will take for the hotel industry to recover? Across the World Recovered Market Recovered Economy United States Unemployment Rate Effect of COVID-19 on Nationalities GDP in Q2 2020 Consumer Spending in US in Billions Source: https://ourworldindata.org/covid-health-economy https://voxeu.org/article/stock-market-and-economy-insights-covid-19-crisis Better Proxy for State of Economic Well-Being? GDP Stock Market Indices Pros: Pros: -Good way to measure policies success -Price in future expectations within and across countries - Accounts for future consumer spending -Reliable indicator of the current state of economic output Cons: Cons: -Doesn’t account for quality of life, -Doesn’t account for unemployment standard of living, happiness, health care -Difficult to compare across countries -Doesn’t account for inequality or -Doesn’t account for quality of life, standard of living, unemployment happiness, health care -Doesn’t account for the wealth gap (10% of the population owns 84% of the stock market) Source: https://www.fastcompany.com/90223130/how-elizabeth-warrens-accountable-capitalism-act-works https://drakesbb.wordpress.com/2013/09/26/pros-and-cons-of-gdp/ COVID & Price Stability: why it’s important - Inflation reflects price of a basket of goods, as monthly % increase (BLS) - Large hole in economy (caused by pandemic, income drop) - Too much stimulus = inflation; too little stimulus = deflation - Economic & social uncertainty caused by COVID - Jeopardizes steadiness of prices - Inflation as indicator of decrease in PP of a country’s currency Inflation: are we seeing the whole picture? - Overall, prices of goods seem to be increasing at steady rates - This doesn’t tell the full story - CPI of essential consumer goods has risen - Consumers are buying more essentials (groceries, medications) - CPI of nonessentials has fallen - Consumers buying fewer nonessentials (airline tickets, clothing, gasoline) - Inflation is likely higher than government statistics suggest (~1% YTD) Cost of Living vs. Cost of Goods & Services - Bifurcation between Cost of Living & Cost of Goods & Services - Real output and Real wages calculated using inflation adjustments that don’t account for higher cost of living during pandemic (measured poverty fallen, food banks demand grown) - (i.e., even if basket of goods increases at steady rates, this doesn’t account for higher cost of living due to pandemic) - Trump stimulus → inflation on back-end of pandemic? Inflation Comparison of Great Recession vs. Covid-19 Gov Response & Implications The Fed Funds Rate was cut to 0% in March, and they introduced a $2T stimulus package ● $560 billion to individuals ● $500 billion to large corporations ● $377 billion to small businesses ● $340 billion to state and local governments ● $154 billion for public health ● $44 billion for education and other causes M2 Money Supply Fed Funds Rate Implications of Inflation Winners: ● People who have debt at a fixed rate ● People who own assets Losers: ● Most workers ○ Keeping wages constant during inflation reduces real wages ● Savers/Retirees ● The entire economy due to uncertainty Implications of Deflation Winners: ● Consumers in the short run ● Savers (people with a lot of cash) ● Workers near minimum wage Losers: ● The economy due to discouraged consumer spending ○ Can lead to a deflationary spiral ● Employees who have less control over their wages .