We are down the data rabbit hole again, as the bizarre behavior of the economy plays havoc with conventions of data reporting. This time, we are told that gross domestic product (GDP) grew 33 percent between the second and third quarters of the year. You will find that figure in cell U-5 of Table 1 of the Third Quarter GDP release from the Bureau of Economic Analysis (BEA) that hit the streets on October 29.
Cooler heads prevailed in some media outlets, but others just ran with the big fat number. The 33 percent figure is misleading for two reasons. First is a convention of data presentation that makes sense in normal times but not now.
Like many statistical agencies, the BEA annualizes its quarterly data by simply multiplying the quarterly figure by four. Using this convention, labeled SAAR (seasonally adjusted annual rates) the annualization makes it easier to compare quarterly figures with annual ones, and seasonal adjustment makes it easier to compare one quarter to another. As long as the observer is aware of this, it is not a big deal.
It gets more complicated when considering growth rates. For the SAAR growth rate, BEA multiplies the quarter-over-quarter growth by four, to get an annualized growth rate. This rate shows what growth would be like for the year if all quarters behaved like the current one. That way we can compare the annualized quarterly growth rate with annual growth rates (calendar, or previous four quarters) to see if growth is rising or falling. All good.
Then comes the weirdness of 2020. The growth rates of the second and third quarters have been completely out of line with anything before or, we hope, after. Quarterly GDP fell by 9.5 percent between the first and second quarters, and then rose by 8.4 percent between the second and third quarters. Annualizing the 8.4 percent gets to that 33 percent growth figure. But annualizing only makes sense if the quarterly figure is consistent with other quarters. In this case, the second and third quarter growth figures are waaaay out of line.
Figure 1 compares the annualized and non-annualized approaches to presenting GDP data.
The second reason the third quarter GDP figures are misleading is because GDP fell so much the previous quarter. We are not growing so much as digging out of a hole, and if we are successful we will just be at ground level again and no better. Rather than paying attention to the nausea-inducing swings of the past three quarters, it is more helpful to look at the third quarter compared to the most recent “normal” quarter, which was the fourth quarter of 2020 (the pandemic shutdown began at the end of the first quarter of 2020). Third quarter 2020 GDP is 2.7 percent below fourth quarter 2019 GDP. Factoring in inflation, the drop is closer to 3.5 percent, which is not out of line with previous recessions.
The fact that GDP has crawled back to within 3.5 percent of its pre-pandemic level after a dive of 10.5 percent is heartening. In the last recession, GDP peaked in the fourth quarter of 2007 and did not get back to that level, after adjusting for inflation, until the second quarter of 2011—three and a half years later! The next 3.5 percent will be tough, as it involves lots of industries that depend on human contact, but the timeline for recovery should be measured in quarters, not years.