Prepare for Liftoff

Buckling Up for 3rd Quarter GDP

On the morning of Thursday, October 29th, the US Bureau of Economic Analysis will release their initial estimate of third quarter GDP. We expect a strong recovery from the record-low second quarter GDP reading of -31.4%. Most economists are looking for a headline reading somewhere around +35% (which would also be a new record – this time in the other direction). 

Admittedly, however, his number can be confusing. Recall that the BEA calculates GDP using a “seasonally adjusted annual rate”, essentially meaning it compares the level of economic activity in the third quarter to the level of activity in the preceding quarter (which included the bulk of the US shutdowns), and then “annualizes” that rate of change as though it were to persist for the next four quarters. 

Hence, just as the -31.4% reading in the second quarter didn’t mean we lost nearly a third of our economic output in 90 days, a +35% estimate for the third quarter doesn’t mean that the economy is operating 35% higher than it was in the prior quarter. Rather, the -31.4% in Q2 meant that the output during the COVID shutdowns was down about 9% from the level of economic output from the first quarter of the year. Likewise, the +35% estimate for Q3 actually means that output in the July-September timeframe was 7.8% higher than it was in the April-June quarter. 

For better context, it may help to frame our current condition in terms of year-over-year levels. At the end of the second quarter of this year, the economic output of the US was about 9% lower than it was in Q2-2019. If we assume the +35% headline number for the third quarter, the US economy will be only about 2.6% lower than it was in Q3-2019. So, while we will have made a tremendous amount of progress, we will not be “back to even”, despite the optics of a +35% reading following a -31.4% reading. 

The point here is that despite business closures earlier this year and a still-high unemployment rate of 7.9%, we are heading in the right direction. Once we finally get a COVID vaccine and deploy it across the US, we expect to see a heavy weight lifted from our economic potential. In the meantime, we are encouraged that we aren’t too far off the pace from year-ago levels, but we still have lots of work to do.