Heartening report on economic growth comes with some fine print

Trump will take a victory lap on the new GDP report, but that's because he won't fully understand what it means.
Retail closures
NEW YORK, NY - DECEMBER 02: People carry shopping bags along Broadway on December 2, 2013 in New York City.(Photo by Spencer Platt/Getty Images)Spencer Platt / Getty Images file

Long before he knew what today's report on economic growth would say, Donald Trump was bragging about it, both on Twitter and in campaign ads. The president and his team didn't see any point in waiting, because it was obvious that the data would show the economy improving in the third quarter (July through September) after suffering a devastating second quarter (April through June).

How much improvement would we see? CNBC reported this morning:

Coming off the worst quarter in history, the U.S. economy grew at its fastest pace ever in the third quarter as a nation battered by an unprecedented pandemic put itself back together. Third-quarter gross domestic product, a measure of the total goods and services produced in the July-to-September period, expanded at a 33.1% annualized pace, the Commerce Department reported Wednesday.

There will probably be some who see this report and assume the economy has recovered. After all, these people might say, if we saw a 33% drop in the second quarter, followed by 33% growth in the third quarter, that means we're back to where we were.

Except, that's not even close to being true. As NBC News reported this week, ahead of the release of this morning's report: "The economy was recovering from a 31.4 percent drop in the previous quarter, the worst decline ever recorded, amid mass stay-at-home orders. And experts say the path to fully making up the losses is rocky — particularly with coronavirus case numbers rising faster than ever before in the U.S. and a lack of a stimulus package."

Economist Mark Zandi told NBC News, "While the third-quarter bounce in GDP will be a record quarterly gain, it isn't all that impressive, as it follows the collapse in economic activity in the second quarter." He added that "even with the third-quarter gain, real GDP will have only recovered about two-thirds of what was lost in the second-quarter free fall."

The math can be complicated, but Vox had a good piece on this from David Wilcox, a nonresident senior fellow at the Peterson Institute for International Economics and the former director of the Division of Research and Statistics at the Federal Reserve Board.

Real GDP would have to have increased a whopping 53 percent at an annual rate in the third quarter to return to its previous level. (Why not 36.4 percent, if GDP declined at a 5 percent annual rate in the first quarter, and a further 31.4 percent rate in the second quarter? Because that's not how it works. Suppose GDP was at 100, and then it fell to 50 — a drop of 50 percent. If it then rose by 50 percent, it would only move back to 75. A similar calculation is required here.)

Also keep in mind that we don't yet know what's in store in the fourth and final quarter of 2020, especially as the severity of the coronavirus pandemic intensifies.

Diane Swonk, chief economist at Grant Thornton, told CNBC, "The concern is we get another setback in the fourth quarter.... November and December could be materially worse. The problem is you're going into the critical season for celebrations and gatherings. If we continue to see the spread, we can't reflate the economy."

Keep this in mind as the president takes a victory lap in response to data he doesn't understand.

Postscript: It's worth clarifying that today's data shows growth at an annualized rate, which is the standard way of reporting the data. In other words, if we saw 12 months of economic activity like what we saw in the third quarter, the economy would grow by roughly a third.

That said, no one seriously believes we will see 12 months like the last three, which is why you'll likely see some focus this morning on a different figure: 7.4% growth, which reflects the change between the second and third quarters.