In the second quarter, the GDP plunged by a record 32.9%. It sure sounds like the sky is falling, but is it really? Let’s take a step back and put the news into perspective.
The COVID-19 shut down has negatively affected the economy, businesses and workers over the last two quarters, and it’s uncertain how quickly the United States will recover. We knew that Q2 gross domestic product (GDP) numbers were going to be horrible. In fact, in May, the federal reserve thought that they were going to be even worse. So, about 33% down is actually better than expected.
But, despite the headlines, we didn’t actually lose 33% of economic production last quarter. The commer’s department reports data on an annual basis to make it easier to compare. So, if you looked at it quarter over quarter, the economy lost 9.5% since Q1.
That’s still an eye-watching blow to the economy, but it’s not an apocalypse.
The largest contributing factor to the economic loss was a steep drop in personal spending, particularly on services. This makes complete sense in an economic shut down. Here are three points to make before we move on.
- This is an advance estimate for Q2, and we will see revisions as more data is finalized.
- Though this is the sharpest drop in the shortest time in history, it was caused by the shut down. And we’re already climbing out of it.
- 63.8% of economists think Q3 is when we’ll see the recovery really pick up steam, and the current forecast is for 15.2% annualized growth this quarter.
So, what’s up with the markets? We think that the markets are being driven by a few big trends.
- In a previous Daily Flash Briefing, we mentioned what a Nobel Prize-winning economist called “FOMO” mania — investors who fear missing out on the bounce. We think that’s still in effect, as investors continue to pile into stocks, especially in the tech sector.
- We also think the market is being supported by massive government spending and Federal Reserve intervention.
- Lastly, we think a lot of traders are betting heavily on the recovery. If states have to shut down again, the collective delusion may collapse and trigger a correction. We’re watching for that.
How long will it really last? That’s anyone’s guess.
We’ve seen many cheerful economist’s forecasts, predicting new all-time highs. We’ve also seen plenty dolefully predicting the next crash. With so much unknown, they’re all guesses.
Even in less murky circumstances, the market gurus are only accurate about 40% of the time. So, since we can’t predict what’s going to happen in Q3 and Q4, we’re staying agile and focusing on the fundamentals of good planning.
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