The 3rd Quarter GDP Report

On Thursday, the Commerce Department announced that U.S. GDP had grown 7.4 percent in the 3^rd quarter of 2020, which amounts to 33.1 percent at an annualized rate. The White House did not hesitate to trumpet the news, calling it the Great American Recovery.

To call such an account hyperbole would be an understatement. Not only is it very far from “great,” calling it “a recovery” is also highly questionable (we must, however, concede that it is American). It is understandable that the Trump campaign, increasingly desperate, would want to politicize what is really not much more than a dead cat bounce. What I mean is that the economy could not help but rebound sharply after an unprecedented plunge (9.0%, 31.4% annualized) in the second quarter. In other words, the collapse in the second quarter shrunk the base against which the 3^rd quarter growth rate was calculated. For a simple example, consider this question: If I lose 25% of my money and then gain 25% the next period, will I return to the sum with which I started? (Hint: no)

To make the point more starkly, even though the third quarter rebound set an all-time quarterly record by far, the economy is still very much in the doldrums. The simple fact is that the country’s GDP is still 3.5% smaller than at the end of 2019. And here is the shocker: Even if there had been no growth in July, August, or September, 3^rd quarter growth, at 5.4%, would still have set an all-time record.

How is this possible? The 2^nd quarter collapse was an entirely April phenomenon. By May and June, the economy had rebounded, and so monthly growth during the 3^rd quarter was actually fairly anemic. This dirty secret highlights just one way in which the headline numbers can massively deceive. More important, it indicates that the “recovery” is already more or less stalled, which explains the rush to push through a new round of stimulus (more accurately dubbed “life preservers” by Virginia Representative Don Beyer) before the November 3^rd vote. The recent resurgence of Covid-19 cases threatens to intensify what is likely already a major depression, with tens of millions still unemployed and struggling with rent, food, and other basics. 

Enough bad news. I will not even go into the various problems with GDP measurement inaccuracy nor, more fundamentally, the disconnect between GDP growth and economic health, subjects on which I expound in both past and future writings. Even when taken at face value, the U.S. macroeconomic figures are grim indeed.