"U.S. GDP Grew 33.1% In the Third Quarter!"

The U.S. Bureau of Economic Analysis (BEA) just reported that U.S. Real (or inflation-adjusted) Gross Domestic Product, U.S. Real GDP, grew at a record rate in the third quarter. This follows a record decline in the second quarter of 31.4%. What does this all mean with respect to our current economic condition?

First, note that the BEA reports these quarterly changes on an annualized basis, as if the observed quarterly percentage change in Real GDP would continue for four straight quarters. This can be misleading. The actual change in Real GDP from the second quarter to the third quarter was +7.4%, a record number in itself. This follows an actual change in Real GDP from the first quarter to the second quarter of -9.0%, also a record. What does a 9% decline, followed by a 7.4% increase, mean? Well, it means that Real GDP in the third quarter is still 2.9% below the level it was at a year ago, in the third quarter of 2019. Or, it means that starting in the third quarter, Real GDP would have to grow 3.6% in one quarter to reach the level that it was at a year ago, in the fourth quarter of 2019. So we are 3% ~ 3.5% below our previous peak level of real GDP.


We can also look at a time series of Real GDP and Potential GDP values since the last recession, the ‘Great Recession.” What is striking about this graph is the speed with which Real GDP declined in the current recession compared to the decline during the Great Recession in 2008-2009. No recession in our history has managed to shut down the economy as fast as what occurred in 2020. This recession has shown just how quickly government actions to address public health concerns can impact the economy.  At the same time, our speedy recovery in the third quarter is due to reopenings that occurred almost as quickly. However, it is clear that we are still far below our previous peak level of Real GDP. We predict that the recovery from here on out will not be quite as rapid. The 3.7% we lag behind Potential GDP in the third quarter is much more than a typical year’s growth in Real GDP. So, as we have been saying, there are two messages. First, the third quarter looks good compared to the second quarter. We have made remarkable progress. But the second quarter was a disaster, and even with the growth in the third quarter, we have a long way to go before we catch up with Potential GDP, and a long time before we are ‘back to normal.’  



Posted: October 29, 2020 by Dennis W. Jansen, Carlos I. Navarro, Andrew J. Rettenmaier