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  October 29, 2020 - BEA Reports that Third Quarter 2020 GDP Grew at a 33.09% Rate:

In their first (preliminary) estimate of the US GDP for the third quarter of 2020, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +33.09% annual rate, up 64.48 percentage points (pp) from the prior quarter.

No, despite what incumbent politicians are likely to claim, the economy was not growing at a +33% rate last quarter. And the recession is not over.

This astounding headline number is a consequence of the BEA's methodology of annualizing quarter-to-quarter changes, similar to last quarter's preliminary headline of a catastrophic -33% contraction. And, contrary to "V" shaped recession and recovery rhetoric, down 33% and then up 33% does not put you back at the point where you started -- after a 33% contraction you need 50% in growth to accomplish that feat. In times of dramatic quarter-to-quarter changes, the best way to understand the state of the economy is to make year-over-year comparisons.

When examining the year-over-year numbers the economy actually did somewhat better during the third quarter than we might have expected. The "headline" aggregate inflation adjusted GDP was down a modest -1.78% relative to the third quarter of 2019 (up significantly from the -8.84% year-over-year contraction for the second quarter). A simple year-over-year table for the second and third quarters tells that story:

Year-Over-Year Change Comparisons

Line Item     Q2 YOY         Q3 YOY    
Total GDP Growth -8.48% -1.78%
Consumer Goods -9.66% -1.71%
Consumer Services -12.46% -5.46%
Fixed Investment -7.04% -1.31%
Government 2.72% 1.52%
Exports -28.89% -17.30%
Imports -26.15% -10.64%




As the table clearly shows, the year-over-year contractions moderated materially across all of the major GDP line items. But did the economy experience a quick two quarter recession and a full "V" shaped recovery? Simply put: no.

Returning to the content of today's flawed release, annualized household disposable income was reported to be $2,255 lower than in the prior quarter, and the household savings rate was reported to be 15.8%, down -10.2pp from the prior quarter but still very high by historical standards.

Among the notable items in the report :

-- Consumer spending for goods was reported to be growing at a 9.24% rate, up 11.30pp from the prior quarter.

-- The contribution to the headline from consumer spending on services was reported to be 16.04%, up 37.99pp from the prior quarter. The combined consumer contribution to the headline number was 25.28%, up 49.29pp from the prior quarter.

-- The headline contribution for commercial/private fixed investments was reported to be 4.96%, up 10.23pp from the prior quarter.

-- Inventories added 6.62% to the headline number, up 10.12pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.

-- The contribution to the headline from governmental spending was reported to be -0.68%, down -1.45pp from the prior quarter.

-- The contribution from exports was reported to be 4.90%, up 14.41pp from the prior quarter.

-- Imports subtracted -7.99% annualized 'growth' from the headline number, down -18.12pp from the prior quarter. Foreign trade contributed a net -3.09pp to the headline number.

-- The annualized growth in the 'real final sales of domestic product' was reported to be 26.47%, up 54.36pp 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 decreased by $2,255 quarter to quarter. The annualized household savings rate was 15.8% (down -10.2pp from the prior quarter). In the 49 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.78%.



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) $21.2 = $14.4 + $3.7 + $3.8 + $-.7
% of GDP 100.00% = 68.04% + 17.34% + 18.08% + -3.46%
Contribution to GDP Growth % 33.09% = 25.28% + 11.58% + -0.68% + -3.09%


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

Q3-2020 Q2-2020 Q1-2020 Q4-2019 Q3-2019 Q2-2019 Q1-2019 Q4-2018 Q3-2018 Q2-2018 Q1-2018 Q4-2017
Total GDP Growth 33.09% -31.39% -4.97% 2.37% 2.57% 1.50% 2.94% 1.31% 2.12% 2.70% 3.78% 3.88%
Consumer Goods 9.24% -2.06% 0.03% 0.12% 0.87% 1.57% 0.52% 0.53% 0.60% 0.88% 0.45% 1.61%
Consumer Services 16.04% -21.95% -4.78% 0.96% 0.96% 0.90% 0.73% 0.52% 1.19% 1.25% 0.95% 1.20%
Fixed Investment 4.96% -5.27% -0.23% 0.17% 0.42% -0.07% 0.50% 0.46% 0.14% 0.76% 1.42% 1.57%
Inventories 6.62% -3.50% -1.34% -0.82% -0.09% -0.97% 0.21% 0.23% 1.58% -0.94% 0.41% -0.50%
Government -0.68% 0.77% 0.22% 0.42% 0.37% 0.86% 0.43% -0.16% 0.44% 0.50% 0.26% 0.49%
Exports 4.90% -9.51% -1.12% 0.39% 0.10% -0.54% 0.22% 0.34% -0.66% 0.24% 0.34% 1.36%
Imports -7.99% 10.13% 2.25% 1.13% -0.06% -0.25% 0.33% -0.61% -1.17% 0.01% -0.05% -1.85%
Real Final Sales 26.47% -27.89% -3.63% 3.19% 2.66% 2.47% 2.73% 1.08% 0.54% 3.64% 3.37% 4.38%




Summary and Commentary

As mentioned above, the headline number should be disregarded -- it is an artifact of arcane methodologies. On a year-over-year basis the economy is still shrinking, although the level of contraction during the third quarter was certainly not as catastrophic as during Q2-2020. By 2020 standards, that is good news.

However, this week's "pandemic third wave" headlines -- when contrasted to today's "happy days are here again" BEA report -- provide a glaring testament to the fact that the BEA's quarterly reporting regimen is utterly worthless in times of dynamic economic change. The economy is not changing at the pace that it was over 80 years ago when FDR called for the creation of quarterly economic reports. And FDR's economists did not have the nearly real-time transaction data that is available now.

Unfortunately, there is probably no political will to make the data better, more transparent and more timely. This month's headline is exactly what many people wanted to see, however "fake" it may be.
 
     

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