Bracing for Bad Data – 2nd Quarter GDP

Tomorrow (Thursday, July 30) we will get the first look at the second-quarter GDP data, and it’s going to be one for the record books. The median estimate is for a decline of approximately 35%. Given that the government only began tracking GDP in 1947 (after the Great Depression), this reading will most likely be the worst on record.

GDP is calculated as a “seasonally adjusted annual rate”, meaning each quarter is compared to the preceding one, seasonally adjusted, then annualized to produce a growth rate (or decline, in this case). So even if the historical data did include the Great Depression, this might still be worse than any readings during that time due to the sharp and sudden nature of the coronavirus shutdown. The Great Depression was a long drawn out process resulting from a number of monetary and fiscal policy missteps and other economic events that were, unfortunately, occurring at the same time (e.g. the Dust Bowl).

We mention all of this in an effort to encourage investors to brace themselves for what may be a superlative-laden news day tomorrow, with headlines boasting of the “worst-ever GDP figure” …likely followed by commercials for gold and other precious metals.

It is most important to understand that GDP (and most economic data for that matter) are backward-looking data, not forecasts. Additionally, we’ve seen recent improvements in other economic figures (see our market update webinar from yesterday) and, because of the quarter-vs-quarter GDP calculation methodology, it is reasonable to believe that the Q3 GDP might be one of the highest on record.

No matter what tomorrow’s reading shows, we remind investors to maintain discipline and not to get too caught up in the headlines. This year has been a case study in how well that advice has worked.