LPL: GDP Forecasts Explained

The economic damage inflicted by the current COVID-19 pandemic has been unprecedented, with thousands of businesses temporarily shuttered and millions of workers out of work. While the historic drop in economic activity is real and will be reflected in the second quarter gross domestic product (GDP) numbers, some nuances in the way GDP is reported may be exaggerating the extent of the damage.

According to data from Bloomberg, the average forecast gathered in April for Q2 quarter-over-quarter GDP growth in the US is -26.3%. So does this mean economic activity will be 26% less this year? The short answer is no. Because these numbers are reported on an annualized basis, these forecasts reflect the change as if it occurred over the full year. In other words, this number needs to be divided by four to reflect the actual change in domestic ouput in the economy. This isn’t meant to trivialize the number, but a 6.5% decrease in output means that the economy is still producing at 93.5% level of what it produced the prior quarter, far better than the more than a 25% hit that some might assume from the headline number.

Further, these numbers are not reflective of the bounceback in activity we believe could come in the second half of the year. “We may get the worst GDP print of our lifetimes in the second quarter,” said LPL Financial Senior Market Strategist Ryan Detrick. “And that could be followed by the best we’ve ever seen in our lifetimes during the fourth quarter .”

For more on why we think this recession could be one of the quickest we’ve ever seen, be on the look out for our latest Weekly Market Commentary due out next Monday.

Source: https://lplresearch.com/2020/04/09/gdp-forecasts-explained/