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Thursday’s historically bad economic growth numbers, explained

It’s not as bad as it looks!

View of a Modell’s store in Manhattan in July with closing sale advertisements, after the company filed for Chapter 11 bankruptcy because of the Covid-19 pandemic.
Lev Radin/Pacific Press/LightRocket via Getty Images

The US economy shrank at the fastest rate on record in the second quarter of 2020, according to data released Thursday morning by the Bureau of Economic Analysis Labor Statistics.

Quarterly GDP statistics are normally calculated in terms of a seasonally adjusted annualized rate, and when you do that, here’s what it looks like — a sharp drop from positive growth in 2019 to a more than 30 percent contraction in the most recent quarter.

A chart showing quarterly GDP from 2016 to Q2 2020. Bureau of Economic Analysis

That’s really bad. Not just the worst on record, but the worst on record by a large margin.

But while the economic situation really is bad, a key indicator, the annualized rate concept, leads experts to believe there may be some hope for improvement. The idea here is that the Bureau of Economic Analysis normally wants to give us quarterly growth statistics that are comparable to annual growth statistics.

A year of 4 percent GDP growth would be really good. A real of 3 percent GDP growth would be good. A year of 2 percent GDP growth would probably be a bit disappointing. So in a normal quarter, we’re trying to ask how the short-term trend compares to those kinds of benchmarks, and we’re asking essentially, “What if we had four quarters in a row that looked like this quarter?”

That’s a fine way to do economic statistics, but it’s a kind of wild question to ask about Q2 of 2020, given that what happened then was a huge number of businesses shut down and consumers withdrew from huge segments of the marketplace.

The annualized rate concept then asks us not “What if things stayed shut down for a whole year?” but “What if we kept shutting things down at the rate they shut down in the second quarter?”

Statistically, the answer to that question turns out to be “economic activity would fall by about a third.” But this is not a question with any real-world implication. Ever since roughly April, the US has been allowing more economic activity, not less. Some of that economic activity has probably been unwise from a public health standpoint and may need to be shut down again in the future. But some of it reflects our improved understanding of what kinds of things — outdoor transactions, things that are compatible with mask-wearing — are safe, and some of it reflects our enhanced ability to conduct business online or in appropriately distanced ways.

When we look ahead to Q3, we’re seeing a lot of industries that are reopening either wholly (dentist’s offices, car dealerships, appliance stores) or partially (restaurants), and we’re probably going to see a historically amazing growth number when expressed as an annualized rate. President Trump will doubly brag that it’s the best economy ever, but of course it won’t be, any more than Q2 was the worst economy.

Instead, what we have, plainly, is a pretty bad economic situation — high unemployment, many retail businesses on the brink or going bankrupt — that has been significantly cushioned by generous government income supports for vulnerable people. Indeed, thanks to the CARES Act, disposable personal income actually went up.

The two big questions going forward are going to be whether deteriorating public health conditions will force a new round of economic pullback, and whether congressional Republican intransigence will lead to big drops in household income as emergency benefits expire.

Until the pandemic is under control, it will be difficult to return to any kind of economic normal.


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