A Grossly Defective Product. How Strong Is The Economy Really?
A few years ago, Paul Wallace penned an article entitled: “GDP Is A Grossly Defective Product.” The recent release of the Q2-2020 report reminded me of it as the media fawned over the 7.6% print.
“Yet despite its theoretical appeal, GDP is, in practice, a fallible measure. It is increasingly becoming one that could be described as a grossly defective product.
While seemingly strong at the headline, the recent report leaves much to be desired when looking below the surface.
Estimates Missed By A Mile
The headline print of 6.35% was one of the most robust rates of “annualized” growth since the early 1980s. However, there are two significant takeaways from this data. First, while the growth rate is impressive, it is $5 trillion in Government spending during the recession that boosted growth. (Chart below is current through Q2 and estimated through Q4)
Secondly, the growth rate is substantially weaker than earlier estimates of more than 13% and a full percentage point lower than the Atlanta Fed’s GDPNow forecast of 7.6%. It also likely represents the peak of the economic recovery. (This is a topic we will address more next week.)