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Did GDP Really Fall by 32.9 Percent?

By Caleb Taylor

How bad were the Gross Domestic Product (GDP) numbers for the second quarter of 2020? 

The data shows an “immense amount of economic pain” from April through June compared to the first quarter but it’s much less than the “headline” number of -32.9 percent released in July, according to UCA Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl in Texas CEO Magazine. In brief, pay close attention to what “annualized” and “seasonally adjusted” mean. 

Horpedahl begins by providing context to the -32.9 percent decline in GDP in the second quarter of 2020. That figure for the quarter is annualized, which “tells us that if the current growth rate continued for a full year, that’s how much the economy would contract for the full year.”

Horpedahl writes:

In normal times it’s a useful number because we normally think of GDP in annual terms. But at this point in the current crisis it is probably more useful to think in terms of one quarter at a time.” 

The second quarter GDP data is also “seasonally adjusted,” which is a statistical technique that tries to remove normal seasonal changes from contributing to GDP fluctuations. However, March to the end of June was anything but a “normal” season.

Horpedahl writes:

There is usually more activity in the second than the first quarter, so even if economic activity stayed the same from the first to the second quarter this year, BEA would call that a decline. That makes sense in normal times, but I don’t think it does right now.”

The  second quarter decline in GDP for 2020 is -7 percent once it’s changed to quarterly instead of annualized and the seasonal adjustment is removed, according to Horpedahl. GDP was $4.629 trillion in the first quarter and $4.306 trillion in the second quarter, which is a decline of about 7%.

Horpedahl writes:

This figure gives us a much better picture of how much the economy contracted from the first to the second quarter. If we perform the same calculation and start in the fourth quarter of 2019, we see that GDP has shrunk by about 12.3%. That’s still an immense amount of economic pain in two quarters, but it’s much smaller than if you simply added together the ‘headline’ first and second quarter numbers, which makes it appear the economy has shrunk by almost 40%.”

You can read the entire column in Texas CEO Magazine here.