October 29, 2020
US Q3 GDP: Good news, but old news
On October 29, the U.S. Bureau of Economic Analysis released the much anticipated GDP growth for the 3rd quarter of 2020. The report details that the United States’ GDP grew by 33.1% over the last quarter. Although at first glance this illustrates a rapid economic recovery amongst the COVID-19 pandemic, further analysis shows that this growth doesn’t convey the whole story.
In the United States GDP growth is measured quarterly, meaning that the reported growth is a direct comparison from Q2 to Q3. However, the top-line number reported ‘annualized’ growth. So, for example, in Q2 when the quarterly contraction was -9%, it was reported as -32%, because we extrapolate as if we’ll keep doing -9 each quarter. Without this extrapolation, we get a non-annualized GDP growth of 7.4% for the third quarter.
Note: These graphs are interactive and responsive. Hovering over specific data points will reveal further detail.
This isn’t really the best way to measure an economy experiencing major swings. The second quarter of 2020 GDP suffered the worst contraction in history, with a nationwide shutdown and surge of COVID-19 infections limiting spending. Therefore, any value immediately after this quarter will be highly inflated due to its low comparison point.
Think of it this way: If you start with 100 and lose 10%, you’re at 90. But if you grow 10% the next quarter, you’re only at 99. You’re below where you started despite a great quarter of growth.
A better point of comparison is the third quarter of 2019, allowing us to see the change from a year over year perspective. Q3 2020 GDP, adjusted for inflation, was 2.9% below Q3 2019 level.
Taking a look at consumer spending also sheds light on the United States’ economic standing. The graph below breaks down consumer spending by state for each month of Q3. Our analysis illustrates that, when compared to last year’s growth instead of the second quarter of 2020, the actual rebound the US experienced in Q3 is nowhere near the growth reported.
In the first week of July, every state experienced a decline in consumer spending compared to the same week in 2019. However, the negative impact was not evenly distributed. States with high tourism and large urban populations like New York, Massachusetts, and Illinois experienced harsher declines, while states like Vermont and New Hampshire escaped major drops due to an influx of urban residents seeking solace from the city.
In the first week of August, we observe modest growth in consumer spending across the board. We can infer that the trillions of dollars in stimulus combined with loosened restrictions and general pandemic fatigue led to this slight increase in consumer spending when compared to 2019 levels. However, it is important to note that the data provided uses credit card transactions to convey spending. Cash transactions have declined rapidly since 2019; many companies have switched to only taking cards, and a preference towards contactless transactions may have led to an overestimation of 2020 spending in the data. Regardless, this modest increase still does not match the 7.4% GDP growth reported. We can also note that we still observe a decline in areas with high tourism and/or dense populations like Hawaii, New York, and California.
How does our GDP growth compare to the rest of the world?
While many countries have yet to report Q3 GDP, our numbers are comparable to what China experienced in Q2 as they emerged from lockdown. When looking at non-annualized data, we can see that the United States’ 7.4% GDP growth in Q3 falls short of China’s 11% growth in Q2. China’s additional GDP growth of 3.6% is illustrative of the country’s successful capitalization of key exports to other nations during the crisis, as well as their strong regional partnerships with neighbors like Vietnam.
So where do we stand now? Looking at the early fall, we can see the United States economy begin to stall out. This makes sense since stimulus funding has run dry and Covid cases are on the rise.
The areas that observe growth—Montana, Idaho, Vermont, and New Hampshire—remain outliers. Not only do they make up a small portion of GDP, they also have an influx of residents contributing to their higher rates of consumer spending.
As we observe consumer spending over the third quarter of 2020, the comprehensive picture tells us a different story from the catchy headline. In fact, based on today’s data the US is on pace to suffer -4% economic contraction in 2020, the worst GDP growth since World War II. The bottom line? The US has a long way to go in its path to full economic recovery.
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