A perfect quarter to see the absurdity of reporting “annual rates” on headlines.
From Wolf Richter to WOLF STREET.
This morning, we were faced with terrible news, which we were all waiting for, but this news, though really terrible, was also a result of something called the “annual rate”. What we saw in the headlines was that GDP, adjusted for inflation, fell by “32.9%” in the second quarter.
This should have been reported as “32.9% annual”. It was an “annual rate”, meaning that the Q2 decline was essentially multiplied by 4 (with adjustments) to get a theoretical figure showing what GDP would look like for the whole year if it plunged like this for four consecutive quarters. But this is unlikely. The Bureau of Economic Analysis, which reported this GDP data this morning, also reports ̵1; deeper into its data – “non-annual” figures. and not annual, GDP fell 9.5% from Q1:
This 9.5% decline in Q2 from Q1 was still the steep decline in almost 70 years of quarterly data, which began in 1947. There were no quarterly data during the Great Depression, only annual data. But for the whole of 1932, GDP fell 12.9%, a sandwich between several years in a row of steep annual decline, and the total decline during those years was terrible. So we are not there yet.
And no, consumer spending did not fall by “34.6%” – this was the “annual level” in the second quarter, which means the current decline multiplied by almost four. Consumer spending fell 10.2% from Q1 and 10.7% from a year earlier:
Consumer spending accounted for 67% of GDP in the second quarter. And that quarterly decline of three.2 percent – and a 10.7 percent year-on-year decline – was gigantic in terms of consumer spending declines. But that was supported by incentive payments and unemployment benefits, including $ 600 a week in federal unemployment benefits, and people spent that money.
The decline in consumer spending was driven by utility costs, which fell 14.7% during the year, including a complete collapse in spending on travel, hotels, food services and personal care, such as hair salons.
Merchandise sales fell just 1.8% from last year, as food sales rose as people moved to eat at home.
Investments in residential and non-residential structures, as well as in intellectual property equipment and products fell 17.9% year-on-year. As businesses canceled or delayed investment decisions, there was a sharp decline in investment in non-resident structures and equipment.
Exports, which add to GDP, fell 23.7% year-on-year. Imports, which reduce GDP, decreased by 22.1%.
Federal government spending increased 6.7% year-on-year. Defense spending rose 4.0% and defense spending rose 10.9%, driven by rescue tools and stimulus money being distributed.
State and local government expenditures marked a decrease of 0.7% from year to year. These governments are struggling with a historic decline in revenue and are trying to figure out how to get through this. But they too are benefiting from the support of the federal government. Without it, the points would be steeper.
So it was a terrible quarter, but it was not a collapse of 32.9% – 32.9% was a “outdated” theoretical figure.
“Obsolete norms” are misleading and should be banned from titles.
The US is one of the few countries in the world to report GDP data on securities on an “outdated” basis. It is more attractive because it increases the figures.
In Europe or Japan, you can read that during a good quarter, the economy grew 0.5%, and that sounds pretty sharp and it’s hard to build compelling headlines for something small. In the US, given the same growth, you would read that the economy grew by 2.0%, which sounds much better, but it is the same thing.
People who just look at the “annual” figures get the wrong impression. “Outdated” figures are reported in all economic publications, but they are deeper, not defined for titles.
I urge government entities that decide this to begin the process of changing it: Report at the top of the data release the “non-annual” figures, and deep down, hidden in tables and details, have a column for the annual figures. for those who love them.
And keep the rest of the people – who have better things to do than digging through 20 pages of GDP data on a Thursday morning – properly informed.
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally have why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and ice tea mug to discover how:
Want to be notified by email when WOLF STREET publishes a new article? Register here.