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 “U-shaped”)

Source: St. Louis Federal Reserve Bank

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

● From February 20th to March 23rd the NASDAQ fell by 37% and the S&P and DOW more than 29% off of historical peaks

● Energy (-47%), Industry and Manufacturing (-32%), Discretionary Spending (-27%)

Source: https://ourworldindata.org/covid-health-economyCAPIQ

The Recovery:● Initially

○ Stimulus package and FED intervention ○ People looking beyond economy to what will happen in

market (swift recovery after shutdown) (looked at China)● Since then

○ Jobs and retail sales have gained momentum ○ Boomed by technology growth (FAANG)

The Crash:

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

Effect of COVID-19 on Nationalities GDP in Q2 2020

Source: https://ourworldindata.org/covid-health-economyhttps://voxeu.org/article/stock-market-and-economy-insights-covid-19-crisis

Recovered Market Recovered Economy United States Unemployment Rate

Consumer Spending in US in Billions

Better Proxy for State of Economic Well-Being?

GDP Stock Market IndicesPros:-Good way to measure policies success within and across countries-Reliable indicator of the current state of economic output

Cons:-Doesn’t account for quality of life, standard of living, happiness, health care-Doesn’t account for inequality or unemployment

Pros:-Price in future expectations- Accounts for future consumer spending

Cons:-Doesn’t account for unemployment-Difficult to compare across countries-Doesn’t account for quality of life, standard of living, 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-workshttps://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 InflationWinners:

● 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 DeflationWinners:

● 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