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On Thursday the government will release its estimate of GDP growth in the third quarter. The number is expected to be something like 35%. Three bits of arithmetic context followed by some advance interpretation.
1. The reported growth of -31.4% for Q2 was less bad than the headline because it was an annualized number--which is what would happen if the economy contracts the same way 4 quarters in a row. The economy really shrunk by 9.0%. https://twitter.com/jasonfurman/status/1288815126552993792
Similarly if the headline growth rate on Thursday is 35% then it will mean the economy grew at 7.8% for the quarter. That is also very, very high--just the better way to think about it.
2. If the economy shrinks by 10% one quarter and grows by 10% the next quarter it will still end up below where it started.
This is because the growth is off a smaller base: if you start at a 100 then a 10% decline takes you to 90 and a 10 percentage increase takes you up to 99.
This is because the growth is off a smaller base: if you start at a 100 then a 10% decline takes you to 90 and a 10 percentage increase takes you up to 99.
If the actual annualized growth rate is 35% for Q3 (so 7.8% growth for the quarter) the actual arithmetic would leave GDP 3% below its 2019-Q4 level and ~5% below the prior trend level.
For context, this is roughly where the economy was in 2008-Q4 relative to 2007-Q4.
For context, this is roughly where the economy was in 2008-Q4 relative to 2007-Q4.
3. GDP growth for Q2 is a weighted average of monthly growth rates that is roughly equal to:
(1*May + 2*Jun + 3*Jul + 2*Aug + 1*Sep)/9.
Based on the monthly numbers it appears as if 2/3rds of what is called Q3 growth actually happened in May and June, before the quarter began.
(1*May + 2*Jun + 3*Jul + 2*Aug + 1*Sep)/9.
Based on the monthly numbers it appears as if 2/3rds of what is called Q3 growth actually happened in May and June, before the quarter began.
Interpretation:
The bad:
--Q3 GDP is a pretty distant rear-view mirror, mostly telling us about five months ago. Now we have virus surge and no stimulus.
--The economy still has a pretty sizable hole and a lot is needed to fill that hole.
The bad:
--Q3 GDP is a pretty distant rear-view mirror, mostly telling us about five months ago. Now we have virus surge and no stimulus.
--The economy still has a pretty sizable hole and a lot is needed to fill that hole.
Some mitigating:
--The level of GDP in Q3 was higher than I and many others expected.
--Consumption growth, especially in May and June was very high, partly due to reopening/reduced fear but also because incomes were protected by UI, PPP and stimulus checks under the CARES Act.
--The level of GDP in Q3 was higher than I and many others expected.
--Consumption growth, especially in May and June was very high, partly due to reopening/reduced fear but also because incomes were protected by UI, PPP and stimulus checks under the CARES Act.
And of course:
--GDP is an aggregate, it tells you nothing about distribution. The economic shock has been very regressive, hurting the vulnerable the most. The initial policy response was very progressive (although still left too many out) but that has now ended.
More needed!
--GDP is an aggregate, it tells you nothing about distribution. The economic shock has been very regressive, hurting the vulnerable the most. The initial policy response was very progressive (although still left too many out) but that has now ended.
More needed!
