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  July 30, 2020 - BEA Reports that Second Quarter 2020 GDP Contracted at a -32.91% Rate:

In their first (preliminary) estimate of the US GDP for the second quarter of 2020, the Bureau of Economic Analysis (BEA) reported that the US economy was contracting at an unprecedented -32.91% annual rate, down -27.94 percentage points (pp) from the prior quarter.

No, the US economy did not shrink by nearly 33% during the second quarter.

Although there are some legitimately startling numbers in the release, the size of the headline number is a consequence of "annualizing" a single quarter of dramatic economic displacement. Even though those displacements may largely persist, the rate at which new ones are occurring has moderated significantly. Unfortunately, the arithmetic behind the headline number is premised on the 2nd Quarter's rate of new displacements continuing for a full year.

The quarter might better be measured in a year-over-year comparison against the 2nd Quarter of 2019. In inflation adjusted "real" dollars the overall economy shrank by -9.54%. Consumer personal expenditures declined only -1.79% in goods but -14.65% in services. The difference between those two categories makes sense -- roughly the same spending level on groceries but fewer haircuts and massages. Other notable year-over-year changes make sense as well: food and beverages purchased for off-premise consumption was up nearly +6% year-over-year, spending on food services and accommodations was down nearly -40% year-over-year, spending on recreational goods soared (up +15.33% year-over-year), and spending on recreational services plummeted -54.13%. In the non-consumer sphere -- and making further sense -- spending by non-profits increased +51.53% year-over-year, while commercial spending on computer hardware (+9.73%) and software (+6.13%) also increased year-over-year.

In a similar vein in an earlier release, annualized household disposable income was reported to be $4,382 higher than in the prior quarter, and the household savings rate was reported to be 25.7%, up 16.1pp from the prior quarter. Once again, the income number comes from an annualization of the Federal relief payments from the CARES act, but the outrageous savings rate seems to indicate that households were reluctant (or unable) to spend those funds.

We could go on, and suffice it to say that the year-over-year changes among the line items will be the fodder of PhD dissertations for years to come. And although it will be utterly lost in the flash and bang of the headline, the BEA also revised all of their data back through 2015, materially shifting growth later among adjacent quarters while increasing overall quarterly growth by an average of +0.04pp.

Although it is largely immaterial, for this estimate the BEA assumed an effective annualized deflator of -2.13%. During the same quarter the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was higher at -1.14%. Under estimating inflation results in optimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been -33.20%.

For what they are worth, the notable items in the report :

-- Consumer spending for goods was reported to be contracting at a -2.12% rate, down -2.15pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be -22.93%, down -18.15pp from the prior quarter. The combined consumer contribution to the headline number was -25.05%, down -20.30pp from the prior quarter.

-- The headline contribution for commercial/private fixed investments was reported to be -5.38%, down -5.15pp from the prior quarter.

-- Inventories subtracted -3.98% from the headline number, down -2.64pp from the prior quarter.

-- The contribution to the headline from governmental spending was reported to be 0.82%, up 0.60pp from the prior quarter.

-- The contribution from exports was reported to be -9.38%, down -8.26pp from the prior quarter. This reminds us that we are in a global pandemic, with foreign trade of all sorts impacted.

-- Imports added 10.06% annualized 'growth' to the headline number, up 7.81pp from the prior quarter. This is the offset to the export number, reflecting decreased imports. Foreign trade contributed a net 0.68pp to the headline number.

-- The annualized growth in the 'real final sales of domestic product' was reported to be -28.93%, down -25.30pp from the prior quarter. This is the BEA's 'bottom line' measurement of the economy (and it excludes the inventory data).

-- As mentioned above, real per-capita annualized disposable income was reported to have increased by $4,382 quarter to quarter. The annualized household savings rate was 25.7% (up 16.1pp from the prior quarter). In the 48 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 2.18%.



The Numbers

As a quick reminder, the classic definition of the GDP can be summarized with the following equation :

GDP = private consumption + gross private investment + government spending + (exports - imports)


or, as it is commonly expressed in algebraic shorthand :

GDP = C + I + G + (X-M)


In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows :

GDP Components Table

Total GDP = C + I + G + (X-M)
Annual $ (trillions) $19.4 = $13.0 + $3.1 + $3.8 + $-.5
% of GDP 100.00% = 67.07% + 15.95% + 19.78% + -2.81%
Contribution to GDP Growth % -32.91% = -25.05% + -9.36% + 0.82% + 0.68%


The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table below we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Final Sales of Domestic Product" and listed the quarters in columns with the most current to the left :

Quarterly Changes in % Contributions to GDP

Q2-2020 Q1-2020 Q4-2019 Q3-2019 Q2-2019 Q1-2019 Q4-2018 Q3-2018 Q2-2018 Q1-2018 Q4-2017 Q3-2017
Total GDP Growth -32.91% -4.97% 2.37% 2.57% 1.50% 2.94% 1.31% 2.12% 2.70% 3.78% 3.88% 2.95%
Consumer Goods -2.12% 0.03% 0.12% 0.87% 1.57% 0.52% 0.53% 0.60% 0.88% 0.45% 1.61% 0.86%
Consumer Services -22.93% -4.78% 0.96% 0.96% 0.90% 0.73% 0.52% 1.19% 1.25% 0.95% 1.20% 0.71%
Fixed Investment -5.38% -0.23% 0.17% 0.42% -0.07% 0.50% 0.46% 0.14% 0.76% 1.42% 1.57% 0.21%
Inventories -3.98% -1.34% -0.82% -0.09% -0.97% 0.21% 0.23% 1.58% -0.94% 0.41% -0.50% 1.05%
Government 0.82% 0.22% 0.42% 0.37% 0.86% 0.43% -0.16% 0.44% 0.50% 0.26% 0.49% 0.04%
Exports -9.38% -1.12% 0.39% 0.10% -0.54% 0.22% 0.34% -0.66% 0.24% 0.34% 1.36% 0.33%
Imports 10.06% 2.25% 1.13% -0.06% -0.25% 0.33% -0.61% -1.17% 0.01% -0.05% -1.85% -0.25%
Real Final Sales -28.93% -3.63% 3.19% 2.66% 2.47% 2.73% 1.08% 0.54% 3.64% 3.37% 4.38% 1.90%




Summary and Commentary

The key points of this report can be summarized as follows:

-- At first glance, the numbers are far beyond merely historically bad.

-- But the year-over-year data is not nearly as disastrous as the annualized headline suggests.

-- We have pointed out before that the BEA's quarterly regimen and methodologies renders their data useless for policy making purposes. It is perhaps an academic treasure trove for PhD candidates, but the policy informing purpose that FDR envisioned for the agency in 1939 is simply no longer being met. In the 21st century -- with millisecond transacting -- there is no excuse for not replacing this exercise with a monthly series, published in the middle of the following month. The "consistency" mantra for maintaining the current series helps the PhD candidates, but it utterly fails the American people. Let the PhD candidates figure out how to reconcile a new monthly series to the historical quarterly data.

-- This sets the stage for an equally outrageous up-side quarterly report, to be published just days before the US 2020 election -- although most voters by that time will be in a "who cares" mode.

There is not much more we can say. Things are bad, but reports like this don't usefully inform any ongoing policy or response debates. And the next release will merely be more of the same. Luckily, the pandemic will probably keep most people from taking note of this mess of a report.
 
     

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