A perfect quarter to see the absurdity of reporting “annual rates” in the headlines.
By Wolf Richter for WOLF STREET.
This morning, we are faced with horrible news, which we have been waiting for all along, but this news, while really horrible, was also the result of something called the “annual rate.” What we saw in the headlines was that GDP, adjusted for inflation, collapsed at “32.9%” in the second quarter.
That should have been reported as “32.9% annualized.” It was an “annual rate,” meaning the second-quarter decline was essentially multiplied by 4 (with adjustments) to obtain a theoretical figure that shows what GDP would look like throughout the year if it continued to fall like this for four quarters in a row. But that is unlikely. The Bureau of Economic Analysis, which reported this GDP information this morning, also reports, more deeply in its data, “non-annualized” figures. AND not annualized, GDP fell 9.5% from the first quarter:
This 9.5% drop in the second quarter of the first quarter was the largest decline in nearly 70 years of quarterly data, which started in 1947. There was no quarterly data during the Great Depression, only annual data. But throughout the year of 1932, GDP fell 12.9%, coming between several years followed by sharp annual declines, and the overall decline during those years was dire. So we are not there yet.
And no, consumer spending did not collapse at “34.6%”, that was the “annual rate” in the second quarter, which means that the real drop multiplied approximately fourfold. “Not annualized”, consumer spending fell 10.2% from the first quarter and 10.7% from the previous year:
Consumer spending accounted for 67% of GDP in the second quarter. And that 10.2% drop quarter-over-quarter, and the 10.7% drop year-over-year, was gigantic when it comes to falls in consumer spending. But it was backed by stimulus payments and unemployment payments, including the $ 600 a week in federal unemployment supplements, and people spent this money.
The decline in consumer spending was driven by spending on services, which plunged 14.7% year-over-year, including a total collapse in spending on travel, hotels, food services, and personal care, such as hair salons.
Sales of goods fell just 1.8% year-over-year, as grocery sales increased as people switched to eating at home.
Investment in residential and non-residential structures, and in equipment and intellectual property products plummeted 17.9% year-over-year. As companies canceled or delayed investment decisions, there were large declines in investment in non-residential equipment and structures.
Exports, added to GDP, fell 23.7% year-over-year. Imports, which reduce GDP, fell by 22.1%.
Federal government spending increased 6.7% year-over-year. Defense spending increased 4.0% and non-defense spending increased 10.9%, driven by the bailout and stimulus money being distributed.
State and local government spending decreased 0.7% year-over-year. These governments are dealing with a historic drop in revenue, and are trying to figure out how to overcome this. But they, too, are benefiting from the support of the federal government. Without it, the drops would have been more pronounced.
So it was a horrible quarter, but it was not a collapse of 32.9%, that 32.9% was a theoretical “annualized” figure.
“Annualized fees” are misleading and should be prohibited in headlines.
The United States is one of the few countries in the world that reports headline GDP data on an “annualized” basis. It is more exciting because it increases the numbers.
In Europe or Japan, you could read that during a good quarter the economy was up 0.5%, and that sounds pretty weak and it’s hard to build convincing headlines that show something this small. In the United States, given the same growth, you would read that the economy grew 2.0%, which sounds much better, but it is the same.
People who only see the “annualized” figures get the wrong impression. The “non-annualized” figures are reported in all economic publications, but they are deeper, they are not designed for the headlines.
I implore government entities that decide this will begin the process of changing it: report the “non-annualized” figures at the top of the data release, and at the bottom, hidden in the tables and details, have a column for the figures annualized, for those who love them
And keep the rest of the people, who have better things to do than search 20 pages of GDP data on a Thursday morning, properly informed.
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