July 30th gave us the first Gross Domestic Product ( GDP) reading for the second quarter of the year. It’s a vital statistic and basically measures the output of our economic engine here in the U.S. The data showed a whopping 32.9% decline in GDP, but what does that number really mean?
Media reports can create some confusion with the data, as the statistic is reported on an “annualized basis.” Put another way, if the output in Q2 were to continue for a full year, we’d experience a 32.9% decline in activity. Annual rates make it easier for analysts to compare data collected over different time periods. If you’ve ever estimated how much you’d save over a full year if you kicked your daily latte habit, or worked out how many home runs a favorite player would hit if his current hot streak lasted for a full season, you’ve performed a similar calculation.
The change from Q1 to Q2 however was a decline of 9.5%. That’s still a significant number, but its just the change from one period to another and doesn’t seem as ominous as the annualized rate. If you receive a $500 bonus at work, you wouldn’t think of it as a $6,000 annual raise because you realize it’s a one-time change.
The historical perspective of the annualized number is illustrated below, and the chart shows it’s the largest decline in history.
The second quarter was an interesting measurement period, as half of the quarter was spent in lockdown while the other half was a slow reopening. The decline was especially sharp in services — travel, tourism, medical care, eating out and the like. Businesses that rely on large groups of customers and heavy store traffic bore the brunt of government lockdowns after the pandemic erupted. Spending on services nosedived at a 43.5% annual pace.
Whatever number we choose to analyze, its clear that we have to emerge from a large economic hole. The threat of additional lockdowns is not good news for the recovery going forward.