What to make of that Q3 U.S. GDP number?

October 29, 2020 – Today’s GDP release for the third quarter came in at 33.1%. Not a typo. After the disastrous second-quarter number of -31.4%, the worst quarterly number on record we now got the best quarterly reading on record. What’s going on here? What do I make of that number? Are we out of the woods now? I’m putting on my economist’s hat for today and share my thoughts in a short post. Let’s take a look…

My April 8 forecast still looks pretty good!

In a post in early April, while we were still in the middle of the recession, I had ventured a forecast for the quarterly GDP numbers in 2020: -4.6%, -35.6%, and +32.9% for the first, second and third quarter. Mind you, this was all before even the Q1 number was released. And the actual numbers were -5.0%, -31.4% and +33.1%. Not bad! Two years into retirement, I still got the forecaster mojo!

GDP monthly calc
From the April 8 post. Actual annualized growth rates were -5%, -31.4% and +33.2%

33.1% is an annualized number!

As I mentioned in my post “The Shortest Recession Ever?” a while ago, U.S. GDP numbers (both GDP and GDP growth rates) are reported at an annualized rate. So the true quarter-over-quarter growth rate is really “only” just about 7.4%. That’s still a massive growth rate. Just to put that into context, with a 2% annual trend growth rate, that’s almost 4 years worth of growth packed into one single quarter. So, we should certainly be ecstatic about the rebound, but don’t read too much into that 33.1% headline number! Just like the -31% disaster in the second quarter was an exaggeration of the true economic decline.

We’re still well below the GDP all-time-high!

So, GDP dropped by 31.4% in the second quarter and then grew by 33.1%. Does this mean that we are 33.1%-31.4%=1.7% above where we were before the pandemic? Well, that’s confounding quarterly and annualized numbers again. But even putting that aside, unfortunately, we’re still far away from a new all-time high. First, GDP had already dropped by 1.3% Q/Q (or 5.0% annualized) in the first quarter. If we add the 9.0% Q/Q drop (or 31.4% annualized) in Q2, then this puts the trough at about 10.1% below the old peak. Even the massive 7.4% jump doesn’t get us out of this hole yet.

Also, notice that growth rates are not exactly additive. If the trough was at -10.1% and we now grew by 7.4%, then we can’t calculate -10.1%+7.4%=-2.7%, so 2.7% below the old peak. The correct calculation would be (1-.101)x(1.074)-1=-0.035, i.e., 3.5% below the old peak. Growth rates don’t add up linearly, they compound. Most of the time the compounding generates “better” outcomes, think of the Rule of 72 where you need “only” 7.2% annualized growth over 10 years to grow your portfolio by 100%. But sometimes the compounding works against you, i.e., if your portfolio drops by 50%, you’ll need a 100% gain to come back to the old level. Bummer!

We’re still well below the old trend growth path!

I always make this case in the context of equity bear markets vs. bull markets: Just making it back to the old all-time-high, as wonderful and as blissful as that may be, is still only a pretty lousy outcome. It means you had an extended period, potentially several years, of only zero-percent growth. So, let’s do the following thought experiment: what if the economy had simply chugged along at a modest, conservative trend growth rate of 2% instead of falling into a recession? We’re now still 5% below that trend, see the chart below. But that’s still not all that bad. Because if we compare the 2020 recession with the 2008/9 Global Financial Crisis and recession, we’re looking slightly better today. Back then in 2011, when we finally reached a new GDP peak, 14 quarters after the recession started, we were still 7% below that 2% trend growth path. In fact, by that measure, we hadn’t even recovered any ground since the recession trough (Q2 2009) when we had a similar gap between actual GDP and the 2% trend path.

GDP recession comp
U.S. Real GDP during the 2008/9 and 2020 recessions. Quarter 0 = previous peak (2007Q4 and 2019Q4). Source: http://www.BEA.gov data as of October 29, 2020.

So, if we could eke out another one or two quarters of above-trend growth and close the gap some more we should be in really good shape. Yeah, there might still be a 3% or 4% gap, and that’s the permanent loss from the crisis because bars, restaurants, movie theaters, and many other businesses will potentially never be the same again in a post-pandemic world. But it’s still better than the 7% haircut after the Global Financial Crisis!

Actually, the shape of the 2020 recession, how short it was and how quickly we recovered and how we are likely going to recover is probably the main reason why the stock market a) didn’t fall as much as in 2009 and b) recovered to a new all-time-high after only a few months (and yes, I know, only the S&P 500 and Nasdaq did, the Dow 30 didn’t). We’re going through the recession at about 5x or even 10x speed, so the stock market simply replicates that fast-forward speed, too!

The GDP number is still subject to revisions!

Not a major concern, but for completeness and full disclosure, we should keep in mind that this is only the very first estimate based on the data we have available today. There will still be revisions as new data come in. And with new data, I don’t even mean macroeconomic data for October, November, and December. That’s all impacting the Q4 numbers to be released in January 2021. New information, more complete information and revisions of the July/August/September numbers will still come in over the next months. Of course, those revisions will not change the current number from +33.1% to -33.1%. But we could easily see revisions worth +/-5 percentage points.

What about the “you know what” situation?

One of the biggest threats to the outlook is the “you know what” situation. I don’t even want to name it for fear of falling out of favor with the search engine gods, which have been very kind to my little personal finance blog recently. So, just like the last time I wrote about the topic, I’m going to invent a code name to denote the situations we’ve been facing this year: “beer,” so, I’ll be talking about “beer cases” and “beer deaths” in the U.S. and abroad.

The code word for the worldwide medical situation is “beer” (clever, isn’t it?). Picture credit: pixabay.com

In the U.S. we’re going through what looks like our third(!) wave of beer cases. And each consecutive wave looks worse! A peak of over 30,000 cases in the spring (measured as 7-day rolling daily average), with a short reprieve down to about 20,000. Then another rise to about 67,000 in the Summer with a short reprieve to about 35,000. And now we’re at about 75,000 cases in October. With a strong upward momentum! We can also plot this relative to the population, i.e., daily cases per 1 million residents, please see the chart below. I also include the “beer fatalities” at the bottom. When looking at cases only, the three waves got worse, measured by cases, (100, then 200, then 230 cases per million). But the good news is that the fatalities didn’t rise: a peak at 6+ deaths per million during the first wave, then 4, and currently about 2.5 per million residents per day despite the increase in cases. 

U.S. Cases (top) vs Deaths (bottom). All figures per 1 million residents.

But just to be sure, there’s some troubling news coming from abroad as a lot of European countries are now locking down again. But if you look at the numbers, they also tend to have significantly higher case numbers, see below the comparison chart for the 29 countries I follow on WorldoMeters.info. Belgium now has a new case average of over 1,300 per day per million residents. Translate that into a country the size of the U.S., and you’re looking at over 430,000 cases per day. Yeah, probably if we had almost half a million new cases every day in the U.S. instead of 75,000, we might be locking down again. But we’re still far from that!

7-day average cases per 1 million residents. Most of Europe is doing much worse than the U.S.!

Also, in the chart below is the beer fatality rate per 1m residents. A similar picture: France and Belgium, countries with some of the most stringent lockdown measures in the Spring, are now a lot worse off than the U.S. And really shockingly, the Eastern-European countries (Poland Czechia) that largely escaped the earlier waves are now going through some of the worst waves. Czechia had 12 deaths per day on average over the last week. If the U.S. had a fatality rate like that it would be over 4,000 daily deaths. We haven’t seen 1,000 deaths on a rolling 7-day average since August!

7-day average deaths per 1 million residents. Most of Europe is now doing worse than the U.S. again. Especially shocking is Czechia, which largely escaped the first wave but is now doing worse than the U.S. during the worst of the first wave!

So, looking at the numbers, I’m certainly concerned about the resurgence of cases, but it doesn’t look like lockdowns are necessary again. I cross my fingers and hope the momentum reverses again soon, just like in the Summer.

We’re not completely out of the woods! 

Even in the best possible case where the “beer” cases and deaths stay under control and we avoid another round of lockdowns, we may not be completely out of the woods either. Unemployment claims are still elevated, and while the direction is still downward (which is positive for the economy, of course) the pace of the decline has moderated quite a bit.

I’m also a bit worried that some components of GDP might have gotten a bit ahead of themselves. Remember, overall GDP is still 3.5% down from the Q4 2019 peak. But looking at the components of GDP, notice how goods consumption, especially durable goods consumption has significantly surpassed the Q4 2019 peak. Same with residential investment (=residential housing construction). I wouldn’t be surprised if there’s even a bit of a retrenchment in Q4 in most of those series once the low-mortgage-rate party subsides a bit. The spike in the demand for TVs, cars, RVs, and other comfort purchases thanks to people flush with stimulus money will probably normalize again, too. I would hope that some of the other series, notably business investment picks up the slack if demand for RVs goes down again!

GDP recession components since 2019Q4
GDP and its components: 2020Q3 relative to 2019Q4. Source: http://www.BEA.gov


There you have it. Today’s GDP release was great news. I will still maintain my prediction that the recession ended on April 30, 2020. But not all is well. There’s uncertainty about renewed lockdowns and some potential hiccups for Q4 growth rates. So, despite all the economic optimism, I don’t want to sound like I’m spiking the football here. The official announcement from the NBER economists calling the end of the recession is at least several quarters away. 

Thanks for stopping by today! Looking forward to your comments and suggestions below!

29 thoughts on “What to make of that Q3 U.S. GDP number?

  1. To start, I always enjoy your posts. To end, I believe you are analyzing numbers that are not remotely connected to reality, and are simply a salve for public consumption. Planes are not flying, aircraft are not being sold, Aerospace Companys are seeing bookings pushed out, etc., and many if not most large and medium sized cities have significant vacant commercial space.

    I own rental properties and immediately dropped rents in March, good for 1 year. My tenants were relieved but are still scared to death and in many instances are suddenly unemployed, underemployed or have been staying home to care for children who were not in school.

    All evidence points to a serious malaise, not a robust recovery.

    All the best.

    1. Allow me to give you a counter point. In my geographic area of the world everyone I know personally has their job back, houses are flying off the market, and there are hiring signs all over. This recession is very sector specific. Depending on the sector concentration in your area I suspect your perceptions of what is occurring can differ dramatically. My contacts from other areas of the US and world are all seeing different things on the ground. I don’t pretend to guess where we go from here, but there are definitely still a lot of people out there doing ok financially as well. I suspect the numbers are accurate on aggregate, but I wouldn’t want a job in travel or service right about now.

      1. Very good point! Here in Southwest Washington, we have a very solid real estate market. Malls, parking lots, etc. seem pretty full. I don’t know any neighbor or friend in the area suffering.
        So, if you mix your experience (very positive) with mine (positive) and the other commenter “A Realist” above (very negative) then you get a weighted average we get the -3.5%. 🙂

    2. It’s quite amazing, isn’t it that we’re only 3.5% below the all-time-high and 5% below 2019Q4+2% growth?
      That said, the 3.5% drop is not equally distributed. A lot of billionaire are richer than ever before. So I can certainly envision how some sectors/industries/states/regions/Zip codes/individuals/families, etc. will be hurting a whole lot more than just 3.5%. Maybe 10% of the population has 35% lower income and everyone else is business as usual.
      So, long story short, your observations of significantly worse suffering is not at odds with my numbers at all.

      1. I absolutely agree that a lot of billionaires are richer than ever before. I am not a billionaire, and yet have had a great year, from my stocks performing, to Real Estate values exploding, to general net worth climbing beyond my wildest dreams. Stocks bouyed by bailouts to industry which then turned around and did stock buybacks while labor is laid off, mean the market has recovered nicely and horray for everyone who is in the market.

        In the past months, California and Washington Refugees have been flooding to my neck of no-wheres-ville and have driven land and home prices up 30% in a year. Other than that, where I live now, day to day life has changed very little in recent months. It is huge, sparsely populated and quite rural. None of this is by accident. My rentals however, are in two different states (due to my having moved twice), and are in very nice, quiet suburban areas which are lovely and safe in every respect. Still. Those properties are also going up in value far faster than they historically have…even with dismal employment prospects in those areas…go figure. That’s great for me, but does not provide any solace to my tenants, who as I mentioned in my previous post do not have the perspective that things are getting better because for them, frankly, they are not.

        This and similar BLOG’s are inhabited by folks who are NOT likely going to be in a downtrodden state and ARE going to participate in the present Stock Market recovery. Just don’t mistake a 401K going up as a National Financial Recovery, and remember that the mere fact that readers here, reading the BLOG, are not likely just surviving day to day…you, I, and they have a plan and are working it, which I believe isolates us quite a bit from the tier of people for whom life is pretty bleak right now. There would not be TRILLIONS of $$ going out in stimulus and arguments for even more, if things were getting better at a record pace.

        The thing is, Stocks and Real Estate going up is not GDP…and it’s the GDP numbers that I believe are cooked.

        Anyway, keep up your excellent work, and look forward to your next installment.

        1. It’s not only professionals who are doing quite well, despite the continuing proliferation of beer cases. Friends who work in the building trades: carpenters, plumbers, HVAC, roofers, hardwood flooring installers, landscapers, etc., all are reporting being OVERWHELMED with work. One general contractor recently told me he is busier now than he has ever been in 30+ years of operating his business.

        2. These are all very good points and you and I can count ourselves the lucky ones. In fact, given that the OVERALL economy is still down, the fact that some of of lucky ones are up, simply means that there have to be pockets of abject poverty and misery due to the recession and shutdown somewhere else. Completely agree. If you look in any economics book you will always find the caveats about using aggregate numbers.

    3. Thanks Big Ern. Great post.

      When you first mentioned “the you know what” I thought you might be referring to the upcoming elections. I have been feeling nearly as stressed about that as about the “beer” situation. Just curious if you think any portfolio modifications or hedges are called for before the big day. I feel a little silly asking this question since we are both passive investors, but these are strange times.

      On a side note, I have never missed a day when it comes to selling SPX put options (since starting your option trading strategy) but I have already decided that next week I will be skipping selling the Wednesday expiration puts I would normally sell every Monday.

      1. Haha, I try to stay out of politics! 🙂
        Some of the predetermined high-vol events can be very profitable for us vol-sellers. I still sold puts, but with a lower premium. Which translated into some crazy, far-OTM strikes. Worked well so far.

    4. I’m really sorry to hear about your rental properties. I’ve had the exact opposite experience here in Central Texas – my rentals are solid with 100% occupancy, and my residents have very secure jobs. The local RE market has not taken a hit.

      In a past life I was a statistician and data scientist. One difficult thing about high level analytics is removing personal experience and bias. For instance, saying that there is a 1 in 11 million chance you will die in an airplane crash is not comforting when you are in the airplane going down. But it doesn’t make that analysis wrong. And if several planes crash tomorrow… that statistical chance changes accordingly with that new data.

      There is, of course, a chance that the global economy will plummet into despair. And there’s a chance it will have a robust recovery. No one will know until it happens and we’re reading about in the history books. But we all like to speculate 😉

      I sure hope your rentals improve and the situation improved for you and your residents in your community.

  2. I don’t know where the economy is going next but I do know this volatility is helping my dollar cost averaging strategy boost my returns. With 5 years worth of dry powder, I continue to plow my excess cash flow into the market during the ups and downs like an unemotional robot and so far, it’s been working out OK. If more beer flows, I’m banking that eventually it will all drain out and even if we’re back to even, I’m ahead.

    1. That’s a nice pot of liquidity. Are you retired or still accumulating? If I had had that kind of cash while still working, I would have deployed it all in March, though. So, that’s why I was never a big fan of the “dry powder” because it wouldn’t last very long. At least during my accumulation phase.
      Now I have some low-risk liquid assets and I didn’t invest them. Not even in March 2020. Retirement changes my risk appetite.

      1. ERN,

        Apologies if you have already written such a piece – and I have missed it – but would “Retirement changes my ….” not be an excellent subject for a whole post?

  3. Thank you, Prof. ERN, on bringing your experience and trained perspective to the latest GDP numbers. To your point about further adjustments to the 3rd Qtr, there a lot of latency data that will only be revealed years after this pandemic has long passed. The lockdowns have caused pain and suffering that will only be truly uncovered years down the road. As a former healthcare administrator who managed 17 cancer centers in the SE, it pains me greatly to read and hear from my former colleagues that cancer patients are missing their treatments and enrollment for clinical trails have diminished. This will result in future huge increased deaths because after all, cancer doesn’t stop for a pandemic. Same can be said for cardiac, suicide, alcohol, and drug abuse diseases especially the unfortunate reversal of the opioid crisis. We will determine that temporarily shutting down the economy was prudent to understand the scope of this disease, however, now that we know who is vulnerable and how to better treat, we need to completely open the economy because the unintended, “ancillary” consequences are greater than Covid-19 itself.

    1. Thanks Eduardo! Though reading your comment about your colleagues’ experience really saddens me. Initially, I was on board with the short, 15-day shutdown initially. But I hear more and more stories like yours about the negative side effects of the extended lockdown.

  4. Great post and analysis, thanks for sharing. And for the “beer” reference… who can stay pessimistic when we’re talking about beer 😀

    1. When you say “economic census reporting isn’t due until end of day today” what data and what deadline are we talking about? Hopefully not the 2020 Census because GDP numbers are completely independent of that.

  5. Doesn’t the experience of the European countries you mentioned kind of tell us what could be possible in the US? We’re entering the holiday season which means lots more people traveling to mingle with relatives and lots more people in stores and restaurants. Also, lots more time spent indoors in general amongst the bigger, more infectious respiratory droplets that come with cold weather. Factor in church superspreader events around Xmas and you have the ingredients of a crisis on par with what the Poles and Czechs are dealing with today. It could get very bad by February when a Biden administration might be willing to consider lockdowns as a way to save a few hundred thousand lives before vaccines can be distributed.

    Second, doesn’t the stock market’s wild performance in the past 6 months stand in contrast to a slightly negative or flat GDP in 2020? If you knew in January that GDP would be -3% in 10 months, would that make you willing to pay even more for tech stocks? If all we’ve done is inflate PE’s and CAPE that’s not good news from a portfolio survivability perspective. And does anyone think Xmas shopping in 2020 will exceed 2019 now that unemployment is 6% higher? The odds of an Xmas stimulus check are near zero.

    A vaccine announcement (expected by EOY) might be a “sell the news” moment, because the rumors are selling like hot cakes today.

    1. Yes. With a Biden victory we’re indeed looking at a repeat of shutdowns and a -30% move in GDP (Q/Q annualized) again. That’s a risk. I hope we can manage the spike without shutdowns because hospitalizations are not as bad as in the Spring.

      Indeed, GDP and the stock market sometimes deviate. Thay are tied through GDP -> Earnings -> Stock market over the very long-term but short-term anything goes. Personally, I’m puzzled about the equity rally. I like the gains but I’m not going to buy a vacation home yet. 🙂

  6. Thanks for the piece. Re: what’s going on with “beer”, let me suggest that – unlike with economic and stock market data, where I’m impressed that you always focus on the correct things – IMO you are looking at the wrong (i.e. not relevant) data.

    Cases of “beer” are irrelevant, for a number of reasons [Can’t believe I actually wrote *that* phrase!]. “Beer” deaths, are a decent measure, but we’ve seen over the last few months that many people died with “beer” rather than from “beer”.

    The most meaningful numbers are “beer” hospitalizations. And when you look at those numbers you do see *some* pockets of meaningful rises, but almost none above the original highs, and few which are troublesome – if by “troublesome” what one primarily cares about is avoiding overwhelming the healthcare system.

    1. Very good point! I haven’t found very easily accessible time series data on hospitalization rates. But it’s good to know that by this measure even the current wave is not as bad as the previous ones! Thanks for confirming! 🙂

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.