How Bad Was Second Quarter GDP, Really?
The advance gross domestic product (GDP) report showed that in the second quarter of 2020, U.S. GDP declined at an annualized rate of 32.9%.
Headlines called it a historically poor showing, the biggest single-quarter decline in GDP since 1947, when the government began tracking the figure using modern methods.
Some other media outlets reported that U.S. second quarter GDP fell at a rate of 9.5%. This is a dramatically negative reading as well, but the decline is markedly less bad than -32.9%.
What gives? Which is the more meaningful or appropriate number? Let’s take a closer look at the record-breaking second quarter GDP declines and get a more accurate grasp on what’s going on here.
First of all, what is gross domestic product? GDP is a broad measure of a country’s total economic output. Essentially, GDP is the total value of all goods and services produced in a country over a period of time.
Politicians, economists, businesspeople and regular citizens use GDP as a yardstick to measure and understand the performance of the American economy. Based on the rate at which U.S. GDP is increasing or decreasing, people attempt to discern things like:
• U.S. economic standing on the world stage.
• The direction of U.S. unemployment.
• How the stock market is likely to perform in the near future.
The Bureau of Economic Analysis (BEA) compiles and publishes GDP statistics on a quarterly basis. GDP is most commonly expressed as a percentage that represents the rate at which this total economic output is either growing or contracting.
When it reports quarterly GDP, the BEA presents the data several different ways to aid in analysis. Among them, GDP is presented as:
• A percentage rate of growth or contraction from one quarter to the next. This figure was -9.5% in the preliminary Q2 GDP report.
• A percentage rate of growth or contraction in the quarter on an annualized basis. This was the -32.9% figure in the preliminary Q2 GDP report.
That latter, annualized rate projects how much the economy would grow or shrink if the rate of change seen in the quarter continued at the same pace for four consecutive quarters, with some adjustments for seasonality and compounding effects.
There are reasons to look at GDP on an annualized basis. When the economy is operating more normally than it is now, annualizing helps you compare the quarter-to-quarter rate of growth for two different periods and understand in which the economy was expanding at a greater annual rate.
The trouble with this annualized GDP reading is that big outliers can create very distorted annualized readings. As the New York Times’ put it, if you got a $500 bonus one month, you wouldn’t think of it as a “$6,000 raise, on an annualized basis.” One-time windfalls like bonuses or one-time economic disasters like Q2 of 2020 can’t really be translated into a long-term trend.
The Extraordinary Second Quarter of 2020
As you may have noticed, the second quarter of 2020 was extraordinary. It’s fair to say that economic performance and the resulting data were a complete anomaly, thanks to the near-total economic shutdown that lasted for much of the quarter in most of the country in response to COVID-19.
In order for the economy to actually contract in 2020 as a whole by an annualized rate of down 32.9%, GDP would need to contract in Q3 and Q4 at a quarter-over-quarter rate similar to Q2, down at least 9.5%.
While many states have begun shutting back down again in light of more recent surges in coronavirus cases, the overall U.S. economy seems largely to have arrested its considerable contraction.
A considerable portion of the GDP contraction in Q2 was due to the coronavirus-driven total economic shutdown, during which there was virtually no retail, travel or hospitality activity whatsoever, accompanied by skyrocketing unemployment.
But economic activity was already picking up at the end of Q2. Consumer spending, especially on homes and autos, increased in June. In addition, 4.8 million new jobs were added in the month, although this part of the recovery appears to be slowing.
It’s worth noting that the quarterly GDP numbers released today are the first of three Q2 GDP reports. These are the advance figures—with second and third readings to come in August and September.
The quarterly and annualized figures will be revised up or down in these two subsequent Q2 releases, as more reliable data emerges. Further adjustments can be made based on seasonal variation, pricing changes and other factors.
Because Q2 measurements of U.S. economic activity were so unusual, it’s highly likely that measurements will be similarly distorted in the future as the economy begins to recover—though likely in the other direction.
In all likelihood, measurements of U.S. economic output in Q3 or Q4 will reflect a rebound that translates into an unrealistic annualized growth rate—a rate that the economy is just as unlikely to achieve as it is currently likely to suffer, based on Q2 figures.
So, yes, the second quarter of 2020 was a dismal quarter for U.S. economic output. The pace at which the economy contracted was by far the worst in recent memory. In fact, it was the worst rate since at least 1947, with only four other quarters in the past 100 years showing greater declines in annualized U.S. economic output.