Late last week, the preliminary Q4 2020 Real GDP estimate was released by the Bureau of Economic Analysis (BEA). Real GDP increased 1% from Q3 to Q4, increasing from $18.597 trillion to $18.780 trillion. For the year, Q4 2019 through Q4 2020, Real GDP was down 2.5%. But it was a volatile and rocky road during the coronavirus pandemic – Real GDP fell 1.3% in Q1, then fell a whopping 9% in Q2 before rising 7.5% in Q3, and then rose an additional 1% in Q4.

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As we have noted before, the BEA likes to report annualized values for rates of change in Real GDP, whereas the numbers in the prior paragraph are the actual percentage changes from quarter to quarter. For instance, the BEA announced that “Real gross domestic product (GDP) increased at an annual rate of 4.0 percent in the fourth quarter of 2020,” This is the growth rate that would be realized if the actual Q3 to Q4 growth rate of 1% were to continue for four consecutive quarters.

What can we say about the recovery since the second quarter? Real GDP reached its all-time record high in Q4 2019 at $19.254 trillion. As mentioned above, Q4 2020 was $18.780 trillion or 2.5% below this all-time record high from a year ago. If we continue growing at 1% per quarter, a growth rate that is much higher than our average of recent years, we should recover lost ground sometime in 2021.

The Congressional Budget Office (CBO) just released its economic outlook and projections for 2021 – 2031, and projects GDP to grow 3.7% from Q4 2020 to Q4 2021, another indication that we will surpass our previous peak of Real GDP sometime in 2021.

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Finally, while getting back to and surpassing our previous peak level of Real GDP will be quite an achievement given where we were in the second quarter of last year, it is important to realize that the country has continued to grow in population over the intervening year, that merely getting back to the output level we achieved in the fourth quarter of 2019 cannot sufficiently be considered a full recovery from the economic harm of the pandemic. In fact, the CBO also computes Real Potential GDP, a measure or estimate of full employment Real GDP. The series of Potential Real GDP in the following graph includes estimates of historical levels through Q4 2020, as well as forecasts over the coming years. Importantly, the estimate of Potential Real GDP for Q4 2020 is $19.331 trillion. Compared to this value, the Q4 2020 Real GDP is 2.9% below potential.

Will we surpass our prior peak level of Real GDP in 2021? The current forecasts suggest that the answer is a strong yes. Will we get back to output equal to potential in 2021? Here the forecasts suggest the answer is a fairly firm no. The CBO projects 3.7% growth from Q4 2020 to Q4 2021, which would give us a Real GDP value of $19.475 trillion in Q4. Meanwhile, the CBO is projecting growth of 1.5% in potential Real GDP in 2021, or growth from $19.331 trillion to $19.624 trillion. So, by end-of-year 2021, we will still be 1.5% below potential, but looking from the perspective of April 2020, that would be quite an accomplishment.

Sources

^{1}https://www.bea.gov/data/gdp/gross-domestic-product
^{2 }https://www.cbo.gov/system/files/2021-02/56965-Economic-Outlook.pdf