Ignore these horrific-sounding economic numbers

The terror began with Goldman Sachs predicting a 24% decline in second quarter GDP—on an annualized basis. Then Morgan Stanley raised it to a 30% decline. Now Capital Economics is forecasting a 40% decline in second quarter GDP, annualized.

This sounds horrific. During the worst year of the Great Depression, 1932, GDP shrank by only 14%. Is the coronavirus recession really two or three times as bad as that?

The answer is no. Not even close. The gremlin here is the “annualization” of data, which ordinarily serves a useful purpose when analyzing numbers. Annualizing a monthly or quarterly number tells you what the real annual change would be if it changed at that monthly or quarterly pace all year long.

Monthly car sales, for instance, are normally annualized, because there are large seasonal differences in sales. The pace of car sales in February, for instance, was 16.6 million at a seasonally adjusted annualized rate, or SAAR. For the full year of 2019, car sales totaled 17.1 million. So the annualized rate in February tells you the pace of car sales had slowed slightly from the actual number of sales in 2019.

Annualized quarterly GDP forecasts, however, are now making the coronavirus recession sound a lot worse than it’s likely to be. “GDP for all of 2020 will not decline as much as the annualized rate in the second quarter,” Ryan Sweet, director of real-time economics at Moody’s Analytics, tells Yahoo Finance. “Any time you annualize something it’s going to be more volatile than looking at it year over year.”

Emily Scully, whose family owns Shultzys Bar and Grill stains trim around the windows on March 24, 2020 in Seattle, Washington. Washington State Governor Jay Inslee issued a Stay at Home order to begin March 25, requiring everyone in the state to stay home for at least two weeks and all non-essential businesses to shut down to help stem the spread of coronavirus (COVID-19). (Photo by Karen Ducey/Getty Images)

Rebound later this year

Moody’s Analytics expects second quarter GDP to drop 18% on an annualized basis. That’s a measure of the change in GDP from the first quarter to the second quarter, annualized as if that were the pace of change for an entire year. But the firm only predicts a 1.9% drop in GDP for the entire year, compared with 2019. That’s because a big rebound in GDP is likely later this year. The second-quarter numbers will be terrible, but with luck they’ll also represent a quick bottom, not a trench we’ll be stuck in for months or years.

If that scenario holds, the annualized GDP growth rates for the third and fourth quarter could look as exaggerated to the upside as the second-quarter numbers are exaggerated to the downside—in the range of 15% or even 20%. But real economic activity won’t be growing nearly that fast. It will be a statistical mirage indicating that growth is once again heading in the right direction, but not as wildly as annualized data suggest.

A more measured way of looking at quarterly GDP numbers is to compare them to the same period a year ago. On that basis, Moody’s Analytics expects 2020 second-quarter GDP to be about 4.2% lower than GDP for the same period in 2019—less than one-fourth the rate of change when annualized.

A 1.9% decline in GDP for the full year of 2020 sounds a lot better than some of the annualized numbers, but it would still be painful. Employers could lay off 10 million workers or more, which would be worse than the 8 million who joined the ranks of the unemployed during the Great Recession of 2008 and 2009. The good news, however, is that economists expect this recession to be shorter than the last one, with businesses hiring people back quickly later this year. That depends, of course, on corralling the coronavirus and developing protocols allowing people to get back to work, safely, by summer or fall. If that doesn’t happen, those scary annualized numbers could become a little more realistic.

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: [email protected]. Encrypted communication available. Click here to get Rick’s stories by email.

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