When the Commerce Division releases its preliminary estimate for second-quarter financial output on Thursday morning, the numbers might be traditionally horrible.
They may even be complicated.
Forecasters count on the report to point out that gross home product — the broadest measure of products and providers produced in the US — fell at an annual charge of about 35 p.c.
However wait. When you learn that final paragraph shortly, you may need come away with the impression that the financial system shrank by greater than a 3rd in a mere three months. That’s mistaken. If forecasters are on track, financial output was about 10 p.c decrease within the second quarter than within the first — nonetheless terrible, however not fairly as scary-sounding as a 35 p.c drop.
Both approach, it’s anticipated to be the worst quarter within the 70-plus years that quarterly G.D.P. statistics have been compiled. However right here’s why you may even see two extensively completely different numbers.
The US has historically reported G.D.P. and another financial statistics as annual charges. Quite than merely giving the share change from one quarter to the subsequent, the federal government experiences how a lot G.D.P. would develop or shrink if that charge of change had been sustained for a full 12 months. (As a result of development charges compound on themselves, this calculation is a little more difficult than merely multiplying by 4. The figures are additionally adjusted for seasonal patterns, so they’re extra correctly described as “seasonally adjusted annual charges.”)
Annual charges make it simpler for analysts to match information collected over completely different time durations. When you’ve ever estimated how a lot you’d save over a full 12 months if you happen to kicked your day by day latte behavior, or labored out what number of house runs a favourite participant would hit if his present sizzling streak lasted for a full season, you’ve carried out an analogous calculation.
However when annual charges are utilized to short-term modifications, the outcomes might be deceptive, as Neil Irwin of The Upshot explained in May. If you received a $500 bonus one month, you wouldn’t think of it as a “$6,000 raise, on an annualized basis,” because you know it’s a one-time windfall, not a long-term change in your income.
Right now, the economy is going through extreme short-term changes. Activity largely halted in much of the country in April, rebounded sharply in May and June, and now looks as if it might be slowing again as surging coronavirus cases force states to slow or reverse reopenings. Those changes are real, and will have a huge effect on family incomes, business profits and state tax revenues. But it doesn’t make much sense to think of them on an annualized basis.
For that reason, in Times coverage of Thursday’s G.D.P. report, we plan to emphasize the simple, nonannualized percentage change from the first quarter to the second. (This is hardly revolutionary — it’s the way most of the rest of the world already reports G.D.P. data.) We’ll still provide the standard annualized figures for people who are used to seeing them that way. And where relevant, we’ll show other calculations, such as the change from a year earlier, or the change since the start of the pandemic.
We plan to follow the same approach for the third quarter, which will almost certainly show a big — and equally misleading — increase in economic activity after the big shutdown in the spring.