By Dr. Steven Weisbart, Chief Economist, Insurance Information Institute
In normal times, economic news isn’t something many people pay attention to, other than—possibly—at the headline level. And the headlines generally sufficiently convey what’s happening with the economy. But we’re entering a period in which the usual measurements of economic activity might be grossly misleading.
Take real GDP, for example. This is the inflation-adjusted measure of the total output of goods and services for the economy. When real GDP is growing from one calendar quarter to the next, that’s a good sign. The growth is often pretty small, percentagewise, and so it is typically expressed as a SAAR (seasonally-adjusted annual rate). This means that the rate for a quarter is treated as if it would continue at the same rate for the next three quarters. This virtually never happens, but it has become the conventional way to express GDP changes, nevertheless.
To illustrate the effect of expressing real GDP changes as SAAR, look at Figure 1.
This chart uses data provided by Blue Chip Economic Indicators, a publisher of a monthly survey of 53 econometric forecasts. Blue Chip averages the 10 highest, the 10 lowest, as well as the median forecasts, and we’ve graphed them in Figure 1. Note that the median of the forecasts in 2020:Q2 is -35.7 percent. This is a staggering dropoff in the economy, but of course no one is actually predicting that the economy would sink by 8.9 percent per quarter each quarter through 2021:Q1 (which is what results from the SAAR adjustment).
So be prepared for gloom-and-doom headlines in the fall when the Bureau of Economic Analysis publishes its measure of the real growth (or shrinkage) of the U.S. economy in the second calendar quarter.
On the other hand, note from Figure 1 that the GDP growth rates for 2020:Q3 and onward are all positive numbers. This is a picture of an economy that is shrinking for only one quarter—the V-shaped recovery that some economists (not us at the Triple-I) have forecast. This too is a distorted impression. To see why, look at Figure 2.
In Figure 2 you see a small dropoff from 2019:Q4 to 2020:Q1 and the big dropoff from 2020:Q1 to 2020:Q2. You also see growth each quarter from 2020:Q3 onward through the end of 2021. However, despite this growth the economy doesn’t even reach the level of output in 2020:Q1—which includes the first month of the recession—at the end of the 2021 calendar year. On New Year’s Day 2022 we will perhaps be celebrating six consecutive calendar quarters of economic growth, but in relation to the prior non-recession years we will still be lacking (assuming that the Blue Chip median forecast is correct).
If you were to match the pattern of recovery to an alphabet letter, you wouldn’t call it a V; there really isn’t a direct correlate to the slow but steady return to the pre-recession level, but a U might suggest that the economy is taking a while to recover fully.