Understanding a Pandemic GDP

On Thursday we were told that the U.S. GDP had shrunk by a never-before annual rate of 32.9 percent. The unprecedented decline was an “advance” number, the first of three that would be released:

GDP Estimates

Moving from the advance to a second and third estimate, each GDP total reflects more information. The advance typically has less data from the third month of the quarter and excludes the businesses that have not yet submitted their numbers. Moreover, for consumer spending, trade, and inventories, the BEA (Bureau of Economic Analysis) needs to depend on assumptions (that will be corrected) wherever preliminary facts are sparse.

Other GDP Considerations

The GDP growth rate is an annualized increase or decline of the dollar value of the goods and services we produce. That just means it reflects a whole year rather than a quarterly change. To get that number, first statisticians compare the current quarter to the one before it. Then, that change is multiplied by four to get what the rate would be for the whole year. So, we really have to divide 32.9 percent by four to see how the GDP declined since last quarter.

In addition, GDP numbers are seasonally adjusted. During normal times, seasonal adjustment helps us avoid misleading data. After all, more spending during the winter holidays does not reflect economic growth. It is just holiday spending that will soon return to normal. So the BEA does an adjustment.

Our Bottom Line: GDP History

During the 18th century we had no GDP nor any economists. But still, politicians wanted to know their country’s wealth. The earliest records of attempts to gather national income data date back to 1665 and then 1695. The real goal was to see if tax revenue could finance and sustain a war.

For more accurate statistics, we needed to wait until the 1930s. When Nobel Economics Laureate Simon Kuznets developed the national income accounting that led to the GDP, he had to decide what should be included. For him, the key was real numbers. He wanted to be sure that we could quantify what was produced through market prices of legal goods and services. That meant excluding work done in the home and including government spending.

Sometimes when we hear a number, just because it is precise, we assume it is accurate. Now though, returning to 32.9 percent, we can assume that lockdowns have certainly exacerbated all GDP difficulties. From annualizing to seasonal adjustments to collection procedures, little is normal. As a record of the goods and services we produce, the 2nd quarter GDP  reflects all that is uncertain in today’s world.

My sources and more: If you want to learn more about the GDP, the one source I suggest is GDP; A Brief But Affectionate History. From there, for current stats, do go to the U.S. BEA and to the Atlanta Fed’s GDPNow model (which currently is at 11.9 percent for the 3rd quarter).