+33.1%. -32.9%. -6.9%
What are these numbers and why do they have any significance to our lives? Respectively, they are the rate of change in the GDP (gross domestic product) of the United States in the third quarter (3Q), the second quarter (2Q), and the first quarter (1Q), in the year 2020. For reference, see here and here.
As the saying goes, give me the good news first.
It looks as if the third quarter GDP had a very substantial increase over the second quarter and in a “normal” year, this would be cause for jubilant celebration. However, there are some things to take into account here which should cause the exuberance to throttle back.
Most of this has been caused, not by an actual increase in productivity within general society, but by extraordinary government spending related to the Covid-19 crisis. For example, stimulus checks sent to everyone have been received and spent, skewing the percentages and making it appear that the country is in the recovery stage. However, that “shot in the arm” has (so far) been a singular event and due to a deadlocked government probably will not be repeated any time soon.
Of course, miracles do happen and it is possible that Nancy Pelosi and Mitch McConnell will come to agreement, shake hands, er, I mean, bump elbows, and congratulate themselves for a job well done. Right, and pigs fly too! At least, though, I am partly correct. They will congratulate themselves, whether the job is well done or not.
If we don’t get another round of stimulus and Joe Biden gets to impose a “very dark winter” because of the panic and hysteria surrounding the Corona Monster, we will likely see a substantial drop in the economy, if not in the 4Q 2020, then almost certainly in 1Q and 2Q 2021.
But, enough of the prognostications anyway. Let’s get back to the actual percentages and explore these from a purely mathematical perspective.
Assume that the economy at the beginning of the year 2020 had a base value of 100. Using the reported GDP drop of 6.9% for the first quarter means that on April 1, 2020, the economy had a base value of 93.1. In the second quarter, the economy contracted an additional 32.9% from that new value. This resulted in a base value on July 1 of only 62.47, which translates to an economic loss from the first of the year of almost 38%.
But, you say, the economy rebounded 33.1% in the third quarter, so we’re almost back to where we were at the beginning of the year. Not so fast, though, since mathematics doesn’t work that way. Keep in mind that we are not dealing with simple numbers, but percentages, and 33.1% of the base value at the end of the second quarter is only 62.47. Therefore, multiplying the base value (62.47) by the percentage increase (33.1) produces an increase of only 20.68 (rounded), which added to the base value results in a total economy of 83.15, or an overall loss of almost 17% from the total economy at the start of the year.
Realistically, in order to bring the economy at the end of 2020 back to where it was at the beginning would require another increase of around 20% in the GDP through the fourth quarter, which is not likely to happen. Most of the 3Q increase was due to government intervention and, since that intervention has not been seen in the 4Q, it seems probable that any increase in GDP will be severely scaled back and may actually show up in the negative column.
Mix in the all-too-likely spectre of officially ordered lockdowns by power-hungry presidents, governors, mayors, and county health departments which will have the immediate effect of throwing vast numbers of persons out of work, drastically reducing their productivity, and the amount of money they have to spend. It should be apparent that the economy is on very shaky ground.
And we thought 2020 was bad. A few years (quarters?)from now, we will call these the Good Old Days.