Warning: Large Numbers Ahead

The United States and entire global economy are experiencing an unimaginable collapse in economic activity. It is not caused by any economic or financial event, but by governments instructing people to stay at home and in many cases to cease working. Over the next few months, the headlines of traditional economic statistics are going to swing from negative to positive in a way that we have never seen before. While the numbers will be mathematically accurate, they will be badly distorted and misleading. The most bizarre data point in the upcoming quarters might be GDP. Let’s assume the shutdown of the economy caused the nation’s economic output to be 16% lower in the second quarter than it was in the first quarter. In annualized terms, which is how the GDP growth rate is reported, it would be an astounding 50.2% annualized decline. It does not mean one-half of the economy suddenly disappeared, it means that is what would happen if the 16% sequential decline from quarter to quarter occurred in the next three quarters. And of course, when the economy snaps back, in either the third or fourth quarter, a 16% rebound would be reported as an 81% annualized growth rate. It is clear that the economic numbers are going to be bad in the near term but it is important to know what they mean to understand what is really going on.

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