Beware of Political Math

Last week the U.S. Commerce Department reported that its estimate of the third quarter’s real gross domestic product (GDP) increase over Q2 was an annualized 33%. One immediate and unsurprising outcome was a slew of pre-election ads by Donald Trump touting his economic prowess. Putting aside the fact that it’s just an estimate that will be revised in future months as the government collects better data, it’s important to understand that when economic numbers are viewed or promoted in a vacuum they rarely mean what they appear to mean.

The first clarification is what is meant by the term annualized. GDP didn’t actually grow by 33% from July 1 through October 31. It really grew by about 7.4%. Annualizing means taking that number and compounding it over an entire year. Why do they do that? It may be because they want to report real growth (i.e. above inflation). Since the inflation rate is always annualized, that’s the only way to consistently report any kind of growth that is inflation-adjusted.

More importantly, even though a non-annualized 7.4% sounds a lot more spectacular than the more typical 1% – 2% quarterly increases we have become used to, remember that it occurred after a 1.3% non-annualized loss in Q1 and another 9% loss in Q2. Non-mathematically savvy citizens might conclude that we’re practically back to where we started before all this pandemic stuff started. Not so. Suppose you had \$1,000 and you lost 1.3 % of it in Q1. At the beginning of Q2 you’d have \$987 remaining. And if you’d then lost another 9% in Q2, you’d end that quarter with only \$898. After the third quarter’s 7% boost you’d still be short \$39 out of your original \$1,000. While that 3.9% loss may not sound like much, try multiplying it by the \$21 trillion size of the U.S. GDP at the end of 2019 and you’ll get a better understanding of the size of the economic shortfall we’ve experienced so far this year.

Keep in mind also that this number is an average across all sectors of the economy, and some have been hit worse than others. According to Ben Casselman in the New York Times the services sector (which includes restaurants and hotels) is down 7.7% for the year so far. That’s a disastrous loss by any measure.

Politicians can and will take any reported government number and spin it to make themselves look good. Don’t accept sound bite-sized proclamations, especially from those with a well-established history of prevaricating. Dig into the numbers until you really understand them. Use critical thinking to screen out lies. It may take more analytical work on your part but you will end up becoming a better-informed citizen. These days we need as many of those as we can get.

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