No, The Economy Didn’t Shrink 33% in 2Q

No, The Economy Didn’t Shrink 33% in 2Q

“Second-quarter GDP plunged by worst-ever 32.9% amid virus-induced shutdown” was the headline on on July 30 announcing the Commerce Department’s first reading on economic activity in the U.S. during the second quarter, during which the brunt of the economic impact of Covid-19 is likely to have been felt. Headlines such as this one (there were countless others just like it) have naturally caused many to believe that the U.S. economy contracted by a harrowing 32.9% during the second quarter. Put differently, many are under the impression that economic output during the second quarter was 32.9% less than output was during the first quarter.

Alas—and fortunately—this was not the case as second quarter real (i.e., inflation adjusted) GDP was actually “just” 7.0% lower than the first quarter’s reading and “just” 9.6% lower than it was during the second quarter of 2019 according to the official figures. Undoubtedly this was a historically bad and economically meaningful decline. However, it was also not the decline of nearly one-third as is assumed (rightfully so) by so many.

So, what gives?

The difference between the reporting and the reality lies in a peculiarity in the way in which GDP (as well as a multitude of other economic figures as well) are reported. Specifically, when it comes to the reporting of GDP figures, the common convention (i.e. the 32.9% decline figure) is to report quarter-over-quarter growth (and declines) as a seasonally adjusted annualized rate of change. It’s reported this way to account for the inherent and relatively consistent fluctuations that occur in economic output through the course of the year such that figures from one period can more easily and reliably be compared to another period. The upshot of this reporting convention is that the proper way to interpret the 32.9% contraction in the second quarter is that if economic growth were to continue to contract for the next three quarters at the same rate at which it contracted during the second quarter, total output on an inflation adjusted basis during the first quarter of 2021 would be 32.9% lower than it was during the first quarter of 2020. This is decidedly different from a 32.9% contraction in a single quarter.

In a wonderful recent commentary, Howard Marks of Oaktree Capital, with input from Conrad DeQuadros of Brean Capital, lucidly elaborated on this topic further:

  • “Actual second quarter real GDP (without seasonal adjustment or annualization) was $4.31 trillion. That was down 7.0% from $4.63T in Q1 on the same basis.
  • If the three subsequent quarters were also down 7.0% from quarter to quarter, 3Q2020 would be $4.00%, 4Q2020 would be $3.72T, and 1Q 2021 would be $3.46T. (These figures you’d never see, since they omit seasonal adjustment, annualization and adjustment form inflation. But I think they preset a fair if not technically correct picture for these purposes.)
  • It’s that figure of $3.46T for 1Q2021 GDP that—after annualization and adjustments for seasonality and inflation—would be 32.9% below GDP in 1Q2020.
  • Interestingly, after the assumed declines, GDP in the four quarters 2Q2020 through 1Q2021 (as enumerated above) would sum to $15.49T for the year. But that would be down only 18.9% from the actual total of $19.11T in the four prior quarters (2Q2019 through 1Q2020).

So, again, the 32.9% reported decline in Q2 is the difference between 1Q2020 GDP and projected 1Q2021 GDP assuming quarterly GDP continued to fall at the 2Q2020 rate. But nobody expects that to happen. Which means the 32.9% is a highly misleading, exaggerated figure. Nothing went down by one-third, and nothing is likely to do so.”

Marks’ takeaway (which I wholly endorse): “So, what I’ve learned is that annualized quarter-over-quarter changes are quite meaningless, including Q2’s reported decline of 32.9%.”



“Second-quarter GDP plunged by worst-ever 32.9% amid virus-induced shutdown” CNBC. July 30, 2020.

“Time for Thinking” Oaktree Capital.


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