Why the biggest GDP drop ever has bright sides

A 33% decline is bad news, but the severity may be exaggerated

Aug 03, 2020 | Editorial | Spending Habits | Business
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Last quarter's GDP was less of a slip...

And more of a free-fall: GDP for the US plunged an adjusted, annualized 32.9%, the worst single-quarter decline in economic activity on record. Moody's Analytics chief economist Mark Zandi went as far as to call the situation our economy faces "...a very deep and dark hole." But there's more to this drop in GDP than the headlines indicate, and while there's plenty to be concerned about (it is 2020, after all), additional details paint a brighter picture.

Why did national GDP fall, and will it affect me?

As with many things in the financial world this year, the pandemic is our driving factor: with people stuck at home and businesses closed, personal consumption, exports, investments, and non-federal government spending all declined, dragging GDP along with them. This collective hit to our combined total of all goods and services could affect your immediate net worth slightly as bad economic news hits the stock market: the Dow fell 225 points for the day, even as tech stocks posted gains. Beyond that slight ding to your investments, what a bad quarter may mean for us is a less optimistic take on our future wealth. Since GDP is used as a benchmark of a nation's standard-of-living, a drop suggests to the world that our national quality of life is in decline. Rather than a deadly bolt of financial lightning, this change to our GDP may better represent threatening clouds in the distance.

Why "33% annualized" doesn't really mean 33%

As the NYT explains, just because GDP fell 33% doesn't mean the entire US economy contracted by a third this spring. GDP is reported as an annual rate, which shows how much GDP would change if our economy was to maintain this pace every month for a full year. Annualized rates, which analysts favor because they make long term data comparisons easier, can sometimes result in buzzy, slightly misleading data if misunderstood. Using the same principle, it would be like getting a $60 parking ticket one month and saying you're paying an annualized $720! In reality, our economic output shrank by closer to 10% between the Q1 and Q2, which is still a serious decline, but not nearly as catastrophic as headlines suggest.

The bad news was still better than expected

As historic as a 33% decline may be, experts expected an even steeper drop: Dow Jones-surveyed economists thought GDP would fall 35% and in June the Atlanta Fed predicted a massive 53% nosedive. The real results outperformed analyst expectations, suggesting that even the pros might be just a tad too pessimistic. And these same experts don't think that 33% decline will be maintained for the rest of the year. In fact, they expect the opposite: economists at Goldman Sachs believe that national GDP will grow by 25% next quarter, as businesses reopen and adapt to the prospect of a pandemic lasting well into 2021. So while our economy may be in a dark place, even the most informed among us seem to expect a coming dawn (although it may take us until 2030 to completely recover and reach pre-COVID forecasts).