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Hashing Out Headlines

August 21, 2020

Headlines surrounding the latest GDP reports were jarring - but what does the data actually mean for the economy? Cut through the media noise with our newest TrendsTalk episode with ITR Economist and Speaker Connor Lokar.


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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hello folks, Connor Lokar here with ITR Economics for our latest trends talk. Today we're hashing out the second quarter GDP report headlines. Now, this may come as a shock to some of you, but these days headlines are rarely crafted to deliver accurate information. Usually their job is to generate clicks or get sustained eyeballs from the viewer, something ITR president Alan Beaulieu discussed in his recent blog post, just a couple of clicks away on our website. So I would say that the headline inaccuracy issue is particularly true for economic reporting. And I would say this rule applies double during the home stretch of an election year. And the headlines and the characterization of the most recent GDP report, which was out in late July were... There were several particularly egregious examples and something I thought it was worth taking a few minutes to unpack here in this recording.

So just to start with the facts are the preliminary 2Q20 GDP reading was horrific, and not that that's surprising. But nonetheless, seeing the final number was indeed jarring. On an inflation adjusted basis, the U.S economy contracted approximately 9.5% during the second quarter, compared to the year prior level, falling to an average annual economic quota around $17.2 trillion, which would be the lowest level in about five years compared with $19 trillion on the dot during the second quarter a year ago. So horrible, just a horrible, horrible number. We knew it would be, but still, it is shocking to see. And we do expect that that 2Q20 is going to be the ultimate GDP low that we're going to eek out an increase in overall economic activity during the third quarter. And will gain slightly more so in the fourth quarter of this year, before a more full and robust recovery and rebound next year, that's of course assuming COVID-19 and governors around the country, cooperate with the recovery. And we're assuming that they will.

But I really want you to be wary when you're comparing these different GDP forecasts and reports that you may hear and read about in the news, because there's really a few different ways to look at the data. Our preferred view is on an inflation adjusted, non seasonally adjusted year over year basis. Basically just looking at where we are today versus where we were at the same time a year ago, and deriving that rate of change. We think that that's a straightforward and productive way to look at it. But, there are several analytical variations. It could include seasonally adjusted data versus non seasonally adjusted, inflation adjusted versus nominal, or in other words, not inflation adjusted. There's year over year growth rates. There's quarter to quarter growth rates. There's annualized data, not annualized data, probably more detailed than you need. But if yoU.See inconsistencies across some of the data quota across different publications, it's due to a variation in presentation and method of analysis, sometimes deliberate and sometimes just accidental.

So for an example, a common theme in, in the headlines a week or two ago was, all caps, the U.S economy contracts, something like 32.9% during the second quarter. That was a really common number, right? Near that 33, essentially taking a third away from the U.S economy. This is not true. This reporting method is called the, "seasonally adjusted annualized rate", which essentially has the effect of exaggerating these quarterly changes. So the highly misleading headline growth rate of that minus 32.9%, that would only be true if all four quarters of the year performed as poorly as the second quarter of 2020 with all its economic annihilation and total government shutdowns, shelter and place orders, et cetera. So basically this reporting method is saying, if we had four quarters in a row perform as badly as the second quarter, it would yield that annualized contraction of 32.9% for the U.S economy for the year.

Now we personally at ITR, we think that's a very confusing way to present it, and not a very productive one at that, given that no one assumes that we will have four straight quarters resembling the second quarter of 2020 with, and why would we. However, that's the way it's been reported. And this is how it's always been done, by the way. I don't know when or why the U.S adopted this seasonally adjusted annualized rate method of reporting for GDP in particular, but we assume it has more to do with generating sensationalized headlines and getting more attention. I mean, just remember GDP, U.S gross domestic product, that giant dataset, in normal times is only moving plus or minus one or two percentage points on a quarter to quarter basis. So at some point in time, it was, folks said, "Hey, if we annualize this and exaggerated it, it makes for a more interesting number and it makes the U.S performance certainly look more impressive during boom times and growth periods than it actually is."

But of course the other side of that coin is, it looks much more severe during recessionary periods. So no, capital N, no, the U.S economy did not sink by nearly one third during the second quarter, I can promise you that. I can almost promise you that whether it's a president Trump or a president Biden come the second quarter of 2021. When the rebound occurs next year, there's going to be some equally gaudy and exaggerated, ridiculously positive numbers reported for the second quarter of 2021, because it's going to be comparing to a really, really low bar. And I promise you, whichever president is presiding over that is going to spike the football. They're going to high five. They're going to take credit for it. All the while the real growth rate will only be a fraction of what's actually reported, assuming it's reported the same way that it was this year. And I very much assume that it will be so. Oh, well, I suppose.

And just, side note related to that reporting quirk above, many other false headlines, were falsely maligning the U.S economic performance in the second quarter of 2020, saying that Europe for example, fared better economically than the United States in the second quarter. Again, this is not true. Europe's economy contracted more sharply during the second quarter than we did. And using that quarter over quarter growth rate, overall Euro area GDP decreased 15%. In the EU specifically, those countries contracted 14.4% quarter over quarter versus a relatively more positive nine and a half percent decline for the United States. So, looking at headlines just from a week or two ago, you can see the misinformation at play. Many outlets were comparing Europe's quarter over quarter rate of change versus that misleading and mischaracterizing annualized minus 32.9% metric, which is an entirely apples to oranges comparison. So I just want you to keep an eye out for that. So, particularly with GDP, but everything economic relating when tracking headlines, if you want the real scoop, I'd keep track with us here at ITR. But then again, I suppose I am a little bias in that regard. So anyway, thanks for checking in. I'll see you next time.


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