GDP Did Not Just Increase 33%
Today's advanced third quarter GDP estimates from the Bureau of Economic Analysis are being reported as showing 33 percent economic growth. This figure is highly misleading, both because it is an annualized number describing a one-time partial recovery and because it is measured off of a deflated base. In reality, GDP grew by 7.4 percent between the second and third quarters, recovering about two-thirds of the GDP loss since the end of 2019.
It is relatively common to report GDP growth in annualized form, since typically a quarter of growth is indicative of a broader trend. However, the current pandemic caused a massive one-time contraction in the spring as businesses were shut down and households were told to shelter in place, followed by a partial recovery in the summer and fall as businesses reopened and the country adapted to a "new normal." When a severe one-time contraction was reported for the second quarter of 2020, we warned against using the annualized number, which would have suggested the economy was on course to shrink by one-third. It would be similarly misleading to suggest the economy is now on course to grow by a third. The non-annualized 7.4 percent is far more appropriate.
Even the actual 7.4 percent growth rate in some ways overstates economic performance. Because the economy is smaller now than it was in the beginning of the year, it would take an 11.3 percent increase in output to offset the 10.1 percent reduction between the end of 2019 and the second quarter of 2020. In other words, the lower GDP base means, for example, an 8 percent increase wouldn't fully recover the loss from a prior 8 percent decline.
In total, GDP remains 3.5 percent below where it was at the end of 2019 and 4.9 percent below where it otherwise might have been. This is a substantial improvement from the second quarter. In fact, the 7.4 percent growth is easily the highest quarterly rate on record going back to 1947, nearly doubling the previous record of 3.9 percent in the first quarter of 1950. Yet the economy remains far from fully recovered and is unlikely to fully recover until the public health situation is under control. In the meanwhile, well-designed fiscal policy could help to speed the pace of recovery.