GDP worst in 26 years? Really?
Maybe I am just being…what’s the politically correct version…uh, overly precise, but I hate when journalists do a crappy job. Take the following offering from CNN.com. The headline on the main page reads:
“Quarterly GDP worst in 26 years”.
That statement is wrong – or at least horribly misleading.
Reading that, it seems to suggest that the most recent quarter’s GDP was lower than GDP in all quarters in the last 26 years. Run for the hills!
I assure you, even with the tough times we are facing, the economy is more than twice as large today as it was in 1983.
While the economy has recently contracted, it has only contracted to the level that was first achieved in Q3 of 2007. We’ve wiped out a bit more than a year’s worth of growth, not 26 years of growth as some might be led to believe from that headline.
What they meant to say was:
“Quarterly GDP growth rate worst in 26 years”.
And that’s not quite right either. They really mean:
“Quarterly real GDP growth rate worst in 26 years”.
That statement would actually be accurate. I’ll save the fun of real variables for your macro professor.
But they continue to screw things up when you actually get to the article. Click on the link, and the following headline and sub-headlines appear:
GDP slides 6.2% on slower consumer spending:
A revised reading on fourth-quarter gross domestic product was its worst in 26 years.
I’ve already railed against the second part. How about the first part?
That, too, is inaccurate – and this one drives me nuts.
I’m afraid GDP did not slide 6.2% in that quarter. (Nor would it be correct to say that real GDP slided by 6.2% in that quarter.)
What the author meant to say was the annualized real GDP real growth rate was -6.2%.
What is annualized growth rate?
They take the growth rate from the current quarter, and imagine that the same growth persists for an entire year. Roughly speaking, the economy shrank by about 1.5% in the fourth quarter or 2008. In the next three quarters also result in 1.5% reductions, at the end of the fourth quarter, the annual reduction will have been 6.2%. Will the economy shrink by 1.5% next quarter? Almost certainly not. It may shrink at slower rate (possible), it may shrink at a faster rate (quite possible), or even grow (don’t hold your breath). You finance types understand annualization — it’s just an example of compounding.
Don’t get me wrong, having the economy shrink by 1.5% in a quarter is not good. It is a rapid decline – but the point is that you have get the facts right. For reference, an “average” quarter would involve a roughly 0.7% increase in real GDP or equivalently, an annualized growth rate of 3%.
To be fair, the article finally does explain stuff…
Gross domestic product, which measures the output of goods and services produced in the United States, fell at an annual rate of 6.2% in the fourth quarter, adjusted for inflation, according to a preliminary report from the Bureau of Economic Analysis.
But after all that — consider the following headlines.
“Real GDP shrunk by 1.5% in the forth quarter, showing the worst quarterly growth rate since 1983.”
“Quarterly GDP worst in 26 years”.
They paint different pictures, no?
–CT
