By Thomas Cooley and Peter Rupert
The BEA announced third quarter real GDP increased 33.1% seasonally adjusted at an annual rate…or 7.4% if not annualized. So, one might ask, “Why does the BEA annualize?” The answer is to make it easier to compare data since some data come out monthly, quarterly or annually. Most countries do not annualize the GDP numbers at all. For example, news reports show 3rd quarter GDP in Germany rose 8.2% and France up 18.2%, these are NOT annualized.
As a quick aside, note that 33.1% is not 4 times 7.4%. What annualization does it assumes that the growth rate for each quarter in the year would be 7.4%, so compounding is involved. The formula to annualize quarterly GDP say is: (((GDP_t/GDP_t-1)^4)-1)*100.
In any event, this was by far a record increase for the US with the next highest being 16.67% in Q1 of 1950. Given the crazy gyrations seen in 2020: Q1 down 5.0%, Q2 down 31.4% and Q3 up 33.1%, where are we relative to where we were at the beginning of 2020? Real GDP in 2019 Q4 was $19.25 trillion and today stands at $18.58 trillion, so we are down about 3.5%.
Over a longer time span, the Great Recession and COVID-19 have pushed our economy well below our long run (linear) trend on a per capita basis. And although the record bounce-back looks like a sharp V shaped recovery there has been significant “scarring” of the economy and there are sectors that simply won’t recover anytime soon – possibly never. Most obvious are the sectors everyone cites – travel, leisure, hospitality, retail, aeronautics, higher education, commercial real estate and fossil fuels. It goes without saying that all of these imply substantial resource reallocation.
Many, many records have been set for the various GDP components. Personal consumption expenditures up 40.7% with durable goods up 82.2%. Gross private domestic investment up 83%, equipment up 70.1%, nonresidential structures down 14.6% and residential up 59.3%. Households are investing in their home-based consumption, buying bigger houses, better appliances, newer cars and so on. But investment in non-residential structures dropped like a rock and shows no sign of recovery.
Obviously the pandemic looks nothing like a “standard” recession. It is easy to see from the graphs that typically it takes years for the economy to reach bottom and then many more years to get back to where it was before the recession hit. During the pandemic things are happening at warp speed. Massive one month or one quarter declines with a rebound the next month or quarter.
The labor market continues to be stressed and with the failure of Washington to deliver more stimulus we may soon see increased labor market pain and a drop in consumption as well. Next week will give us the latest snapshot of labor market conditions.
