Ignore GDP Plunging 33%. Pay Attention To The 9.5% Decline.
The U.S. Bureau of Economic Analysis or BEA released its first estimate for June quarter’s GDP and it was pretty much as ugly as forecast. While the 32.9% decline was better than some economists had been expecting, it was still the worst one officially recorded (official estimates only go back to 1947). Previously the largest drop was 10.0% for the March 1958 quarter, and during the Great Recession the worst decline was 8.4% in the December 2008 quarter.
The GPDNow forecast from the Atlanta Fed is not an official estimate for GDP but is based on economic data published during a quarter. It gyrated more than normal for the June quarter due to Covid-19 but both its estimate at negative 32.1% and the Blue Chip consensus of approximately down 33% were very close to the BEA’s advance estimate. This is pretty amazing given all the stresses put on the economy due to the coronavirus and the drastic impact on consumer behavior.
Multiplying by 4 distorts the reading
However, the 32.9% decline is distorted due to the way the BEA calculates it. What the BEA does is to use the quarter-to-quarter change in the economy and essentially multiply it by four to get an annualized number. The BEA is assuming that the one-quarter change will continue for the next three quarters.
That means if the economy grows 1% from one quarter to the next it reports an annualized rate of 4%. With a large economy and moderately consistent growth rates this calculation gives a fairly accurate description of the economy.
However, with the economy being decimated by the coronavirus and being put in lockdown for a few months, the multiplication effect can distort how people perceive June quarter’s result and the subsequent outlook for the next quarter or even a year.
Look at the year over year 9.5% decline
One way to help mitigate the multiplication effect is to look at the year over year change. Too much can be made with one quarter’s large negative or positive number and does not portray what is actually occurring in the economy. However, it is important to realize that the 9.5% year over year decline is also the largest one officially recorded. The previous worst reading was a drop of 3.9% in the June 2009 quarter during the Great Recession.
Using the year over year change will be important as the economy recovers, especially in the September quarter as early estimates are for GDP to increase by at least 10% and upwards to 25% or even higher. In reality it may take over a year from now when hopefully there is a vaccine that is widely available so that the distortions created by the coronavirus are not having as much of an impact.
The economy has lost $2 trillion in output
To understand how much the economy has been impacted beyond percentages is to see how much economic output has decreased. Over the past two quarters there has been a $2.1 trillion decline in the economy. The last time output was this low was five years ago in late 2014, early 2015
- 4Q 2014: $17.1 billion
- 1Q 2015: $17.3 billion
- 4Q 2019: $19.3 billion
- 1Q 2020: $19.0 billion
- 2Q 2020: $17.2 billion