What Do the Latest GDP Numbers Mean for Businesses?
August 7, 2020
GDP contracted quite severely for the second quarter – so what are the actual implications of that? Catch our newest TrendsTalk episode with ITR Senior Business Advisor Alex Chausovsky to learn how businesses may be affected.
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Transcript by Rev
Alex Chausovsky:
Hello, everyone. My name is Alex Chausovsky. I'm a senior business advisor at ITR Economics. Welcome to another edition of TrendsTalk with ITR. Today, I wanted to speak to you about GDP. Last week, we had our first initial reading for the second quarter GDP number here in the United States, and the number was pretty negative.
Most of the media outlets touted a figure that said that GDP contracted 32.9% in the second quarter on an annualized basis. But what does that actually mean? How do we really understand the implications to our businesses, to the various segments of the economy from a contraction like that?
Well, I think the first thing that you have to realize is how those numbers are being calculated. Typically, when the official government number is published, what they're basically talking about is comparing the performance of the second quarter of this year to the first quarter of this year, and then taking that performance and annualizing. Or essentially, taking it to a factor of four.
In other words, what they're basically saying is, "We are assuming that, if GDP performed this way in all four quarters of the year, this would be the result." The way that ITR looks at GDP data is actually quite differently. We mimic our analysis based on the way that businesses look at their own performance. So when we compare the second quarter of this year, we're not going to be comparing it to the first quarter, we're going to compare the performance to that of the second quarter of last year.
When we do that, when we look at 2Q GDP for the 2020 calendar year and compare that to the second quarter of 2019, we get a number of minus 9.5%. That means that the second quarter was 9.5% below the second quarter of last year.
That in and of itself is a fairly historic figure. The three month moving average for GDP is at the lowest level in over five years, the 32.9% contraction, as I mentioned, is annualized. But the 9.5% quarter-over-quarter growth rate is actually one of the lowest that we've seen in a really, really long period of time. Essentially, since The Great Depression of the 1930s.
So it's really important to understand that, when you hear these very horrific numbers, whether it's online or in various media outlets, you've got to understand how they're calculating and, really, what does it mean? We believe that, because businesses track their own performance year over year, our own metric, which is called the 3/12 rate of change or the quarter-over-quarter growth rate, is actually much more representative of what happened in the second quarter.
Now, it's not surprising that it was so negative, considering that we had the major shutdowns across the country in the late part of March, and certainly, throughout April. But what is also important to think in the context is, the way that we compare our performance to other economies around the world. For instance, one of the main media outlets recently talked about a Eurozone contraction in the second quarter, and then they compared it to that 32.9% contraction, annualized, that they reported for the U.S.
They didn't actually do an apples-to-apples comparison. What they did was, they took basically a seasonally adjusted number for the second quarter performance in Europe, which actually came in at minus 12.1%, and compared it to the annualized number here in the United States. So it really made it seem like a 12.1% contraction was much better off than the 32.9% contraction we had here in the U.S.
The reality is, they should have been comparing that seasonally-adjusted number to the 312 rate of change, or the minus 9.5%. From that perspective, what they would have shown is that the U.S. economy, although did experience a significant contraction, was not as negatively affected as what we saw in the European economy in the second quarter.
That really highlights the need to be very, very diligent in making sure that you understand what the economic data is saying to you. We here at ITR put a great deal of effort and a lot of analysis behind all of our conclusions. And so, if you ever come across something that you're reading about or are interested in learning more about, we encourage you to reach out to us, talk to us about the information that you're getting, and make sure that your analysis is sound, based on accurate data, and that you are making apples-to-apples comparison. Because, so many of your critical business decisions are based on that information, that you've got to make sure that the data you're using is reliable and it makes good quality analysis possible.
I hope this has been helpful to you taking into context some of the ways that the numbers have presented and making sure that you do those apples-to-apples comparison. But, as I mentioned before, please do reach out to us if you have any questions. We're here to help. Thanks so much for joining us today, and we look forward to welcome you to the next edition of TrendsTalk with ITR Economics. Have a great day.