that economists pay attention to when figuring out

if the country is in a recession.

- GDP. - GDP.

- 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)