Business valuators must have a firm grasp on the current state of the economy in order to successfully complete a business valuation engagement. Many finance and valuation professionals rely on economic components and indicators as a key point of reference in their work. These components can have a significant impact when valuing businesses, evaluating mergers and acquisitions, and performing a variety of other financial analyses.
The Economic Outlook Update (EOU), published by BVR, digests expansive research from leading authoritative sources into convenient monthly and quarterly reports. Get a sneak peek at the 2Q 2020 EOU with a few key economic performance components showing insights on gross domestic product (GDP), consumer spending, and government spending.
Gross domestic product
The Bureau of Economic Analysis (BEA) reported that the nation’s economy—as indicated by GDP—suffered through its worst quarter in history, decreasing at an annual rate of 32.9% in the second quarter of 2020. The second-quarter decline signaled the continuation of the downward spiral to the U.S. economy caused by the coronavirus pandemic, which initially slowed the U.S. economy by 5.0% in the first quarter.
The 32.9% decline in the second quarter was due to sharp contractions in personal consumption, exports, inventories, and investment. Spending by state and local governments converged to bring down GDP, which is the combined tally of all goods and services produced during the period. Personal consumption, which historically has accounted for about two-thirds of all activity in the U.S., subtracted 25% from the Q2 total, with services accounting for nearly all that drop. Imports, which are a subtraction from GDP, decreased.
Final sales of domestic product decreased at a rate of 29.3% in the second quarter, an accelerated decline from the decrease of 3.6% in the first quarter. Final sales of domestic product are GDP minus the influence of private inventory investment, which tends to be volatile from quarter to quarter. In 2019, final sales of domestic product rose at a rate of 2.2%. Final sales to domestic purchasers, or GDP excluding trade and inventories, declined at a rate of 28.2% in the second quarter, after a decline of 4.6% in the prior quarter.
Consumer spending in the second quarter of 2020 decreased at a rate of 34.6%, substantially slower than the decline of 6.9% in the prior quarter. In 2019, consumer spending grew at a rate of 2.4%. Consumer spending, also referred to as “personal consumption,” accounts for approximately 70% of the U.S. GDP.
Retail sales figures over the past 12 months increased 1.1% after annual declines were seen in the past two months. Six of the 13 retail sales categories saw an increase in sales. Sales at nonstore retailers grew 23.5%, sporting goods, hobby, musical instruments, and bookstores increased 20.6%, building materials and garden equipment and supplies dealers increased 17.3%, and food and beverage stores increased 12.4%.
Total government spending increased at a rate of 2.7% in the second quarter of 2020, faster than the rate of 1.3% in the prior quarter. The second-quarter figures in government spending added 0.82 percentage point to the GDP. In 2019, government spending increased 2.3%.
Federal government spending increased 17.4% in the second quarter, compared to 1.6% in the prior quarter. The increase was attributed to federal stimulus money as part of the coronavirus relief plan. Federal government spending has been positive for 11 consecutive quarters, increased at a rate of 4.0% in 2019, and added 1.23 percentage points to the second-quarter GDP rate.
National defense spending increased 4.1% in the second quarter of 2020. National defense spending was 5.6% in 2019. The second-quarter rise came after a decline of 0.3% in the first quarter, which had been the first decline after seven consecutive quarters of increases. Federal nondefense spending increased 39.7% in the second quarter.
State and local government spending decreased 5.6% in the second quarter. In 2019, state and local government spending increased 1.3%.
Download the full 2Q 2020 report for more economic data
Download the complete 2Q 2020 issue of the EOU to see more stats on interest rates, exports and imports, consumer prices and inflation rates, energy prices, and more. Plus, learn about an annual subscription to the EOU, an ideal resource for the current economic conditions section of your valuation report.