Economy hits record growth in the 3rd quarter but that's very deceiving

Quarterly growth in real (inflation-adjusted) gross domestic product for the past 10 years.

The Bureau of Economic Analysis reported Thursday that growth in real (that is, seasonally and inflation-adjusted) gross domestic product was 8.275% in the third quarter compared with the previous quarter. That’s 33.1% on an annualized basis, the highest level since modern record-keeping began 73 years ago. From now until the final day of the election on Tuesday, Donald Trump and his remaining minions no doubt will boast about the “boom,” asserting that the economy has regained all that was lost in the devastating second quarter when GDP plummeted 31.4% on an annualized basis. But basic arithmetic shows we regained all. More about that in a moment.

Expect Trump’s usual mindless patter: he’ll call this the greatest recovery ever and nobody could have done it but him, perhaps even poaching one of his own favorite lines from the pandemic—we’re turning the corner. Nonsense, obviously, as known all too well by anyone who has seen their unemployment benefits shrink, still hasn’t found a job or has had pay and hours cut, has drained all savings, faces eviction because they haven’t been able to afford rent for months, and realizes additional government relief is a no-go for at least another two weeks, possibly until January or beyond. 

“This is the quarter that captures the reopening of the economy,” said Tim Quinlan, an economist at Wells Fargo Securities, adding that “it’s a far cry from signaling the all-clear that the economy’s in great shape here.”

At Vox, David Wilcox, the former director of the Division of Research and Statistics at the Federal Reserve Board and now a nonresident senior fellow at the Peterson Institute for International Economics, noted in an analysis this week:

The second-quarter decline was triple the size of the previous worst-ever quarterly drop since the current method of score-keeping began in 1947. A couple of quarters during the Great Depression and during the decommissioning after World War II were probably worse, but when you need to reach back to the ’30s and ’40s for comparisons, you begin to get the idea of how bad the second quarter of this year was. [...]

Real GDP would have to have increased a whopping 53 percent at an annual rate in the third quarter to return to its previous level. [...]

Suppose GDP was at 100, and then it fell to 50—a drop of 50 percent. If it then rose by 50 percent, it would only move back to 75. A similar calculation is required here.)

At the Economic Policy Institute, Josh Bivens points out that not only did the third quarter leave us far from a real recovery but also hints that the fourth quarter we are now a third of the way through will likely generate very slow growth … at best.

[T]he economic sources of rapid third-quarter growth are obvious: momentum from reopening following coronavirus-driven shutdowns and income growth buoyed by the generous relief measures included in the CARES Act. Neither of these sources of growth will recur going forward, unless there are radical policy changes. The virus is resurgent across much of the country, and smart public health measures are needed to allow many aspects of life to continue safely in the face of this resurgence. The income support of the CARES Act has completely evaporated, and very soon growth will become throttled by income-constrained households forced to cut back spending. This household pullback in spending will be quickly followed by pullbacks in public spending from state and local governments. Policy can relieve this demand gap stemming from both household and state and local public-sector constraints, but if this demand gap is not addressed, then growth will falter badly in coming quarters.

While it’s obvious the economic situation is better for millions than it was during the worst of the Pandemic Recession in April and May, we’re still 11 million jobs short of where we were in January, with some 4 million of the lost jobs permanently gone, tens of thousands of small businesses permanently shuttered, and state and local government laying off workers and cutting back services as tax revenues have plunged. With the coronavirus spreading like a prairie fire and cases, hospitalizations, and deaths rising precipitously, it would be no surprise to see another, albeit small,  economic contraction in the fourth quarter given the failure of Republicans in Congress to agree on a new round of relief legislation. 

Although GDP is the broadest measure of a nation’s economic activity, it fails on many levels. More than a half century ago, in a famous speech at the University of Kansas, Robert F. Kennedy said of this gauge:

Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.  And it can tell us everything about America except why we are proud that we are Americans.

Several economists have sought to come up with something that does a more comprehensive job than GDP. They have found the task difficult. Tim Jackson at CUSP discusses RFK’s 1968 comments and the efforts, including his own, to generate a better gauge. 

Back in 2008, French President Nicolas Sarkoky asked Nobel laureate in economics Joe Stiglitz, Harvard economics professor Amartya Sen, and Jean-Paul Fitoussi, an economics professor at the Institut d'études politiques de Paris, to look into the inadequacies of GDP as a gauge of economic well-being and come up with what it would take to create a more inclusive measurement. The result of their work is “Report by the Commission on the Measurement of Economic Performance and Social Progress.” Out of this came no replacement for GDP. But since the report appeared in September 2009, Stiglitz has continued to push. For instance, he joined Fitoussi and Martine Durand, the director of statistics and chief statistician of the OECD, to write Measuring What Counts: The Global Movement for Well-Being.

The Guardian last year published an Op-Ed by Stiglitz, who wrote— It's time to retire metrics like GDP. They don't measure everything that matters—in which he noted:

For a long time I have been concerned with this problem – the gap between what our metrics show and what they need to show. During the Clinton administration, when I served as a member and then chairman of the Council of Economic Advisers, I grew increasingly worried about how our main economic measures failed to take into account environmental degradation and resource depletion. If our economy seems to be growing but that growth is not sustainable because we are destroying the environment and using up scarce natural resources, our statistics should warn us. But because GDP didn’t include resource depletion and environmental degradation, we typically get an excessively rosy picture. [...]

Getting the measure right – or at least a lot better – is crucially important, especially in our metrics- and performance-oriented society. If we measure the wrong thing, we will do the wrong thing. If our measures tell us everything is fine when it really isn’t, we will be complacent. [...]

Measuring better is a key ingredient for making the economy better.

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