Skip to content Skip to footer

The Rude Awakening

It is now obvious to say that the US economy is going through one of the worst periods in its history, due to the developments of “Covid-19” epidemic and its repercussions on consumers and investors.

But the recent economic performance data caused confusion among some. With one of the highest recorded magnitudes of Gross domestic product [GDP] contraction in the second quarter, the contraction reached more than a third of the size of the economy.

Confirmed deflation and stagnation

The US Bureau of Economic Analysis announced that the gross domestic product of the United States shrank at an annual rate of 32.9% in the preliminary reading for the second quarter of this year, in the largest quarterly decline in the country’s history.

The US economy contracted by 5% in the first quarter of this year, officially entering a state of recession after shrinking GDP for two consecutive quarters: the traditional definition of a recession.

Even on a monthly basis, the national lockdown and social distancing measures brought an end to the longest economic expansion in American history that lasted for 128 months in a row that ended in February.

The biggest blow to the US economy in the second quarter was represented by a decline in consumer spending at an annual pace of 34.6% and a decrease in private investment by 49% amid the uncertainty of the “Covid-19” epidemic.

While government spending was the only positive development, with a 2.7% increase after the strong rise in federal spending to offset the virus’s impact on the economy.

But does this really mean that the US economy lost 32% or more than a third of its value in just 3 months? In fact, that did not happen!

GDP and its measurement

To decipher this ambiguity and remove the confusion that some may have, we must first explain what GDP is and how it is measured.

The size of a country’s economy is measured by the value of its gross domestic product or GDP in a period, often one year.

GDP is the total of all goods and services produced and is measured either by face value or fixed value which excludes the effect of price change over time.

In the United States, the value of gross domestic product at constant prices reached the level of 19.254 trillion dollars at the end of the 4th quarter of last year.

In the first three months of this year, the US economy contracted due to its vulnerability to the virus crisis, starting from February, bringing the GDP to an annual pace of $ 19.010 trillion, losing $ 243 billion.

In the second quarter of this year, the gross domestic product continued to decline to an annual pace of $ 17.205 trillion, which means that the value of the goods and services produced declined in the second quarter compared to the first three months of 2019 by about $ 1.805 trillion.

If you deduct the size of the economy by the end of the second quarter from its recorded value in the first three months of the same year, you will find that the GDP contracted by only 9.5% on a quarterly basis.

So, what is the correct number: quarterly shrinkage of 9.5%, or annualized contraction of 32.9%?

In fact, both are correct and used in the official data, but the first shows the actual volume of change on a seasonal basis, while the second highlights the decrease if the current rate of contraction continues throughout the year.

Thus, the annual or annualized rate of GDP contact is calculated on a 12 month period.

The aim of using the annual pace is to find an easy way to compare economic numbers over different periods of time.

The annual pace provides a forecast of overall performance over an entire year in case the same situation continues throughout the other quarters.

Of course, this method of presenting economic data can be tricky and a little misleading for many followers, especially in exceptional times, as is the case now.

For example, if a person gets a 500 riyal financial bonus in a month, then it would not be logical to consider this increase as an annual pace of 6000 riyals, because he knows that this is an unexpected thing not to repeat in the same way.

Consequently, presenting data across the annual frequency leads, in some unusual cases, to “extreme” values ​​that depart far from normal or logical performance.

In fact, the United States is not only presenting economic figures at the annual pace of GDP, but even data on sales of homes, cars, etc. is presented in the same way.

For example, US data released on the 22nd of July showed that existing home sales in the United States rose 20.7% to 4.72 million units in June compared to the previous month.

Is it logical for a country to see more than 4 million homes sold in just one month? Of course not, but the annual pace here expresses an overall expectation of what will be sold if the same performance continues for 12 months.

In short

The American economy suffered a historic blow in the second quarter of this year due to the repercussions of the national closures and the efforts to control the outbreak of the epidemic.

But whether it is measured at or without the annual pace, the recorded contraction in the US economy is the worst since at least 1947 when the quarterly data was first announced.

Just as the numbers were large and perhaps puzzling in the second quarter using the “annual pace”, the expected recovery in the third and fourth quarters may yield a similar result, however, on the positive side this time.

This data should not be considered as the final, as the US GDP is evaluated 3 times through initial data, then a second reading, followed by a final third. This data should be used in conjunction with the other 30 economic data points, released quarterly, to create a more wholistic view of how the US economy is doing.

The second reading of US 2nd quarter GDP data is scheduled for August 27.

Tradeview Ltd. is not a portfolio manager or an investment advisor. This Market Report is for informational purposes only. Any statements made or opinions voiced in this Market Report do not constitute investment advice. The Tradeview Ltd. Market Report does not constitute a solicitation to buy or sell in the financial markets. Although the information contained in the Market Report comes from trusted sources, Tradeview Ltd. is not responsible for guaranteeing the accuracy, timeliness, completeness, or fitness of such sources. Tradeview Ltd. shall not be responsible for and disclaims all liability for any losses which may be suffered from access and use of the contents of the Tradeview Ltd. Market Report. Trading any financial instrument on margin, using leverage or otherwise involves considerable risk. Therefore, before deciding to participate in any style of trading, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. Consulting with your investment counselor, attorney, accountant or other professional upon whom you rely for guidance as to the appropriateness of an investment in any style of trading is recommended.

Tradeview Ltd.

Is licensed to carry on securities investment business and is regulated by the Cayman Islands Monetary Authority (CIMA) as a full securities broker-dealer. Tradeview conducts business pursuant to the Cayman Islands Securities Investment Business Law (SIBL) and its activities fall under the direct supervision of the Investments and Securities Division of CIMA.
Headquarters: 5th Floor Anderson Square, 64 Shedden Road, Georgetown, Grand Cayman, Cayman Islands KY1-1002, BWI.

Tradeview Asia Ltd.

Is licensed and regulated by the Labuan Financial Services Authority (FSA) as a Money Broker, registration number LL15870 licensed to facilitate transactions in foreign exchange pursuant to Labuan Financial Services and Securities Act 2010, the Labuan Companies Act 1990 and the Labuan Business Activity Tax Act 1990.
Headquarters: International Business Financial Centre at Office 5, Jamie Business Center I, Unit F10, First Floor, Paragon Labuan, Jalan Mustapha, 87000 Labuan F.T.

Tradeview Europe Ltd.

Is licensed as a Category 2 Investment Service Company and is regulated by the Malta Financial Services Authority (MFSA). The Malta Financial Services Authority (MFSA) is the single regulator for financial services in Malta. MFSA is a fully autonomous public institution and reports to Parliament on an annual basis. The MFSA is a member of the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the International Organization of Securities Commissions (IOSCO) and is a signatory of the Multilateral Memorandum of Understanding with other European regulatory Institutions. Tradeview is authorized to provide financial services across multiple asset classes and is passported in the EU/EEA under MiFID II (EU Markets in Financial Instruments Directive).
Headquarters: 157 Archbishops Street, Valletta VLT Malta 1440.

Tradeview Financial Markets S.A.C Global

Is authorized to conduct business pursuant to and in compliance with the General Law of Companies (LGS) promulgated by the government of Peru. Tradeview Financial Markets S.A.C is registered with the National Superintendence of Public Registries (SUNARP), company number 13089531. Tradeview Financial Markets S.A.C provides financial services in selected OTC derivative markets in compliance with all applicable government regulations.
Headquarters: Los Mirtos 239 Urb. San Eugenio, Lince, Lima, Perú.