The Commerce Department’s Bureau of Economic Analysis (BEA) released the first estimate of the 3rd quarter’s gross domestic product this morning — referred to more commonly as GDP, a topic covered at length in my macroeconomics classes.
GDP was reported to increase at a seasonally and inflation-adjusted 33.1% annual rate, a record increase. However, many will misinterpret this number. It does not mean that, since the last quarter, overall production in the United States has increased by a third. If you look at the data, you’ll see a 7.4% improvement compared with the prior quarter — much different than 33%.
Well then, James, what does it mean?
In July, I addressed this issue when the same report on the US GDP stated a decrease of 33%. However, that post was months ago and now buried in the depths of Medium. Hell, that was before the new logo! I believe it is vital that students, entering all sorts of fields from journalism to policy to business, understand how GDP data are collected and reported. Therefore, we’re writing about it again.
There are three things to know about how GDP is reported: The numbers are seasonally-adjusted, inflation-adjusted, and annualized. The reason for numbers being reported in these ways is to help with comparing data across time.
When data are seasonally adjusted, they are adjusted to remove seasonal variation in the data. For example, overall consumer spending is higher in the fourth quarter of the year due to the holiday season. The reported numbers consider this.
Inflation occurs when prices in an economy rise as a whole (deflation is when they fall). There are many reasons why inflation may happen. Some examples include more money being circulated (not necessarily ‘printed’), increases in overall demand, or decreases in overall supply. Since prices change over time, and GDP is meant to measure the economy's production, the GDP data are reported as being adjusted for these changes. These numbers are referred to as the real GDP (RGDP). How they adjust these data are a whole nother story that I won’t cover today.
When the BEA reports the GDP data from a quarter, they are not reporting the amount of production in those three months. They report what a full year would look like (again, adjusting for both inflation and seasonality effects) if this quarterly production occurred. The headline percentage-change number is also reported as the annualized change. This means that, if the trend continued for a year, how would the economy look?
To make this clearer, let’s look at some current numbers:
US RGDP Q4 2019: 19.254 trillion (annualized)
US RGDP Q1 2020: 19.011 trillion
US RGDP Q2 2020: 17.303 trillion
US RGDP Q3 2020 (a): 18.584 trillion
If you take the percentage change from Q2 2020 to Q3 2020, you’ll see that number is 7.4%.
Today’s data shows the economy expanding by 7.4% in the 3rd quarter. It did not expand by 33%. The data show that, if this continues for a full year and adjusted for both seasonal differences and price changes, we would see a 33% increase in economic activity.
Boy, wouldn’t that be something! (Spoiler: It will not happen)
James Tierney is an improviser and economics instructor. Follow him on Twitter for some amusement. Check out these other articles on economics he’s published to Medium:
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