By: Matt McDonald, Lloyd Miller, Isabel Steffens, JinAh Kim
Tomorrow’s GDP release won’t capture the depth of the current crisis the U.S. economy is facing.
Tomorrow at 8:30 AM EDT, the Bureau of Economic Analysis will release its first estimate for the U.S. GDP for the first quarter of 2020. Current predictions range from zero percent growth to as low as -10 percent. This GDP release is more heavily anticipated given that the quarter may mark the end of our historically long economic expansion and the beginning of a recession; nevertheless, there are several important factors to understand as we get our first GDP number for 2020.
- The BEA’s first estimates in recessions sometimes miss. When the BEA released its first GDP estimate for the fourth quarter of 2008, they reported GDP declined at an annual rate of 3.8 percent from the previous quarter. We now know the GDP decline that quarter was over 2 times worse, dropping 8.9 percent in Q4 2008.
- This crisis didn’t start until the end of the quarter, and BEA’s first estimates rely heavily on data from the first two months of the quarter. BEA collects data from other government agencies and trade associations and then interprets them to produce a single figure. The methodology of this process means the first GDP estimate relies more on monthly data from January and February (29.7 percent of the first estimate is drawn from monthly data, compared to only 1.7 percent in the second estimate). The COVID-19 economic crisis did not start until March 9, when the Dow dropped over 2,000 points, or even a week later, when the first wave of unemployment insurance filings (3.3 million) occurred.
- Personal consumption figures will be difficult to interpret. As the Dow plunged, the NBA and NCAA shut down, and Tom Hanks announced he had coronavirus, there was a demand surge for certain consumer products. Just look at the Google search term trends for “Where to buy toilet paper?” or check your local grocery store for canned soup. GDP is driven by personal consumption, which is responsible for the majority of the economic growth over the past year. At a time when consumers are building up inventory, we may even see a pull forward of Q2 consumption into Q1.
Our economic data and the processes used to collect it are generally built to help us understand if we are going the speed limit, or if we need to hit the gas or tap the brake. It’s not really built to measure the use of the emergency brake on the highway. So while we are about to get our first information on 2020 GDP, we should still look around us to better understand the state of our economy.