The perfect quarter to look at the absurdity of reporting “annual rates” in headlines.
Wolf Richter for Wolf Street.
This morning we were faced with the terrible news we had been waiting for all along, but this news, while truly terrible, was also the result of something called the “annual rate.” In the headlines, we saw that inflation-adjusted GDP fell by 32.9% in the second quarter.
This should be indicated as “32.9% per annum”. This was an “annual rate”, meaning that the fall in Q2 was multiplied by 4 (adjusted) to get a theoretical figure that would show what GDP would look like for the whole year if it continued to fall in this way for four consecutive quarters. But this is unlikely. The Bureau of Economic Analysis, which reported the GDP data this morning, also reports ̵1; deeper in its data – “not annually” figures. AND not annually, GDP fell by 9.5% from the first quarter:
This 9.5% decline in Q2 from Q1 was still the most rapid decline in nearly 70 years of quarterly data beginning in 1947. There were no quarterly data during the Great Depression, only annual data. But for the whole of 1932, GDP fell by 12.9%, declining between several years of rapid annual declines, and the overall decline during these years was terrible. So we’re not there yet.
And no, consumer spending did not fall by “34.6%” – it was the “annual rate” in the second quarter, which means an actual decline multiplied by about four. “Not annually” consumer spending fell by 10.2% compared to the first quarter and by 10.7% compared to last year:
Consumer spending accounted for 67% of GDP in the second quarter. And this drop of 10.2% for the quarter – and 10.7% in the annual decline – was huge in terms of reducing consumer spending. But this was backed up by incentive and unemployment benefits, including $ 600 a week in federal unemployment benefits, and people spent that money.
The decline in consumer spending was driven by spending on services, which fell by 14.7% over the year, including a full-scale collapse in spending on travel, hotels, food services and personal hygiene, such as hairdressing.
Sales of goods fell by only 1.8% year on year as food sales increased as people moved to eat at home.
Investments in residential and non-residential buildings, as well as in equipment and intellectual property decreased by 17.9% year on year. As companies canceled or postponed investment decisions, there was a huge drop in investment in non-residential buildings and equipment.
Exports, which increase GDP, increased by 23.7% over the year. Imports, which reduced GDP, fell by 22.1%.
Federal government spending rose 6.7 percent from a year earlier. Defense expenditures increased by 4.0%, and defense expenditures increased by 10.9% due to the distribution of funds and incentives.
State and local authorities spent 0.7% compared to last year. These governments are struggling with a historic drop in revenues and are trying to figure out how to achieve this. But they also enjoy the support of the federal government. Without it, the drops would be steeper.
So, it was a terrible quarter, but it’s not a collapse of 32.9% – 32.9% – it’s an “annual” theoretical figure.
“Annual rates” are misleading and should be banned in headlines.
The United States is one of the few countries in the world to report GDP data in headlines on an “annual” basis. This is more exciting because it increases the numbers.
In Europe or Japan, you can read that the economy grew by 0.5% in a good quarter, and that sounds pretty tricky, and it’s hard to build compelling headlines about something so small. In the US, given the same growth, you read that the economy grew by 2.0%, which sounds much better, but it’s the same.
People who just see the “annual numbers” get the wrong impression. “Non-annual” data is reflected in all economic issues, but it is deeper, not intended for headings.
I urge government agencies that have decided to start the process of switching them: Report at the top of the data publish the figures, “not annually”, and deep down, hidden in the tables and details, there is a column for annual figures, for those who want them.
And inform the rest of the people who have better to do than dig 20 pages of GDP data on Thursday morning – to inform properly.
Do you like reading WOLF STREET and want to support it? Using ad blockers – I understand why – but want to support the site? You can donate. I really appreciate it. Click on a mug of beer and iced tea to learn how:
Would you like to receive email notifications when WOLF STREET publishes a new article? Register here.