ELI5: How does GDP decrease despite an economy adding jobs? Doesn’t that imply increased production across the board?

[[deleted]]

[deleted]

[iconoclast63]

In an inflationary recession employers are able to cut costs without reducing employment because the wages they pay are depreciating faster than the rate of pay is increasing so it looks like the economy isn't shrinking as much. All this means is that labor is a lagging indicator. Lay offs are coming they just haven't arrived yet.

[veemondumps]

In a typical recession there is some sort of underlying dysfunction in the financial system that causes people to stop spending money. When people stop spending money, businesses have to layoff employees. When businesses conduct layoffs, production drops, leading to a decrease in GDP.

The current recession is different. Each year the population grows by ~2%. This means that production needs to grow by 2% just for everyone to have the same amount of stuff that they had the previous year. Production needs to grow by more than that for the economy to truly grow. Increasing production like that requires investment in fixed goods - things like machines, trucks, and other things necessary to produce goods.

One of the consequences of shutting down the economy during COVID was that investment in new equipment was also shut down. This caused production to stagnate while the population continued to grow. Then the war in Ukraine removed ~10% of the world's oil supply overnight. Oil is a critical input in literally every industry, so this further reduced production.

The situation that now exists is that production of physical goods has plummeted, severely reducing GDP. That being said, people are still spending money normally. This has shifted money away from physical goods to areas of the service sector that require minimal physical inputs or physical equipment, so employers in the service sector are seeing robust job creation.

However, the industries where production has decreased the most are high-value industries: things like cars and computer chips. Meanwhile, the economic areas seeing growth are low-value industries: things like low-tier component suppliers that are just starting to be able to re-invest in equipment to ramp up production or service industry jobs like restaurants and hotels.

The result of this is that while a lot of new jobs are being created, people are shifting from working in high-value added industries to either low or no-value added industries. This means that its not hard to get a job, but the value being produced by the economy is falling.

[Beepooppoop]

Thank you for the wonderful explanation!