It broke records, and no one wants to see anything like this again. The Commerce Department’s Bureau of Economic Analysis (BEA) reported that real GDP, after falling at a 5 percent annual rate in real terms during the first quarter, plummeted at a 32.9 percent annual rate during the second. Collapse described every major sector. The economy seemed to be on the verge of disappearing. But there is less here than meets the eye. Though these ugly figures bring home the cost of anti-virus lockdowns and quarantines, however otherwise necessary they may have been, they do not describe either the current economic situation or the future. On these scores, the more recent and robust May-June economic response to the re-openings is much more relevant and much more encouraging.
This horrible second-quarter news needs perspective. One source emerges from the BEA’s preference for stating growth at annualized rates. The BEA does this because presenting all percent changes as if they persisted for a year makes for easy comparisons between growth rates that span different stretches of time. When looking at quarterly numbers, however, as this GDP report does, this practice of annualizing the rates also makes the numbers larger, in this case frighteningly so. Thus the annualized real GDP drop of 32.9 percent for the second quarter amounts to a quarterly drop of about 9.5 percent. Of course, a quarterly drop of nearly 10 percent is still scary, but it nonetheless looks much more surmountable than the much larger annualized figure.
A more critical point of perspective comes from the recognition that all data are by nature backward looking. That is especially so of this batch for the second quarter. Because the BEA measures growth from the average of one quarter to the average of the next, these figures say more about the economic hole in which the economy began the spring quarter than about what is happening in the economy now, much less in the future.
A look at monthly data where it exists illustrates the biases involved. Take retail sales, a big part of the economy. These entered the year growing at a reasonable pace. But in March, as the quarantines and lockdowns began to go into place, they plummeted 8.2 percent. So as the spring quarter began, retail activity was already some 6 percent below the average of the first quarter. With anti-virus strictures fully in place, April sales fell an additional 14.7 percent, putting them some 20 percent below the average level of sales in the first quarter. (Bowing to the BEA preference for annualized rates, that shortfall would have all but whipped out all retail sales across America if it persisted for a year.) Starting in this deep hole, even May’s impressive 18.2 percent monthly growth rate and June’s 7.5 percent monthly growth could not lift the level of sales averaged over the entire second quarter (including the horrible month of April) even close to the first quarter figure (which included the relatively strong sales of January and February.) The same pattern holds for other sectors of the economy as well.
Getting a fix on the economy presently and its future depends less on these second quarter averages than on the strong response to the economic re-opening recorded in May and June. This information not only is nearer in time, but it at once reflects the effect of re-openings and excludes the worst artificial effects of the lockdowns and quarantines. To be sure, the pace of growth exhibited in May and June – by retail sales, residential construction and other sectors of the economy – will slow. A pent-up demand swelled growth rates during these first two months of lifting strictures, but even anticipating a slowing, that recovery is more significant to the future than are the averages drawn from a distorted past, dramatic as they look in either tabular, graphic, or narrative form.
There is reason to expect another economic boost in coming months. Businesses need to replenish the inventories that ran down during the emergency. Because the virus and the anti-virus strictures interrupted supply chains, what few sales did occur during the emergency and especially in May and June exhausted inventories. BEA reports that inventory stocks dropped by almost $380 billion during the first six months of the year. That is almost 2 percent of the entire economy. Inventory declines counted against growth calculations especially in the spring quarter. Replenishing those inventories, which business will certainly do in the face of rising sales, will enhance future growth rates.
Of course, the encouraging pattern that emerged in May and June could face a headwind if rising infections force a return of anti-virus strictures. (Even if rising infections do not justify a return of strictures, there is a risk that governors, drunk with the power they have had during the emergency, refuse to get out of the way of their state economies.) Barring such events, the pattern of recovery clearly already set in motion should bring a striking third quarter growth when it is reported late in October. Its persistence, more than any backward looking news, no matter how ugly, is key to the economy going forward.