CFE Analysis

What Do GDP Figures Show?

The United States, unlike many countries, releases its GDP figures as annual rates. That makes no sense now, when there are clearly forces at work that will not continue for quarters to come. It makes more sense to say the economy contracted 9.0% in the second quarter and expanded 7.1% in the third quarter.

But wait a minute. Didn’t you read that the economy expanded more in the third quarter than it contracted in the previous three months, that it was up at an annual rate of 33.1% after falling at a rate of 31.4% in the second quarter?

Yes, that is what the news release from the Bureau of Economic Analysis says. But annualizing increases makes the figure rise more than annualizing a comparable decrease makes it fall. Something can grow 100% or even 200%. It can’t go down more than 100%.

Annualized changes can be informative in normal times. An economy that advances by 1% over a quarter, can be said to be growing at a 4.06% annualized rate, with the assumption being that the quarterly trajectory has some chance of being replicated in the quarters ahead.

An annualized growth rate over 4% would be impressive, and annualizing the number helps demonstrate it was a good quarter. But there were good reasons to feel confident that the second quarter decline would not be repeated, and annualizing the rate led to confusion. There were commentators who said almost a third of the economy had vanished. That was wrong. A similar discussion of the third quarter expansion would be equally misleading.

That said, it is instructive to look at the actual changes in GDP – as reflected in today’s preliminary numbers – over the past three quarters, since the economy peaked in the final quarter of 2019, before the pandemic struck. The figures compare the seasonally adjusted annual spending rates in the third quarter to the same figures for the final three months of 2019.

 tdree Quarter Change
Total GDP-3.5%
Personal consumption expenditures, total-3.3% 
Personal consumption expenditures, goods6.7% 
Personal consumption expenditures, services-7.7% 
Gross private domestic investment, non-residential-14.0% 
Gross private domestic investment, residential5.1% 
Exports of goods and services-15.3% 
Imports of goods and services-7.1% 
Federal government2.6% 
State and local government-1.9% 

Total GDP is 3.5% lower, Q3 2020, than it was in Q4 2019. After hearing 30-percent plus annual rates batted around, that might not sound like much. But it is. Since the government began reporting quarterly GDP in 1947, the only worse three-quarter period before this year was early in the financial crisis, a 3.8% fall ending in the first quarter of 2009.

Personal consumption expenditures are lower, overall, but that decline masks two very divergent performances. Astonishingly, real consumer purchases of goods, in Q3 2020, were substantially higher than real goods purchases in Q4 2019. In stark contrast, real consumer spending on services was down sharply over the period.

For goods purchases, that reflects people buying things they had wanted but delayed purchasing in Q2. Such make-up spending may have been completed, and the fourth quarter number may be less impressive.
On the services side, there is no makeup buying for many things you halted buying earlier. You don’t need two haircuts now to make up for the one you missed.

Businesses cut back, and investment spending has not recovered – except in home building. The combination of super-low interest rates and a worry about city living has produced a suburban building boom.
Both exports and imports are down, but imports have held up better than exports, thanks in no small part to government efforts to subsidize people and businesses. If the government fails to provide more subsidies soon, that could change.

And state and local government GDP is down, a fact that reflects cuts in employment as tax revenues plunged. Democrats have pushed for more subsidies for governments, but Republicans have resisted, saying big-spending Democratic cities and states are to blame. If the election next week ends in a continued stalemate on such aid, the effect on local governments could be severe.