We, and many others, have been reporting that GDP growth in the second quarter could likely decline at a record analyzed pace estimated to be between 30-40%. The consensus estimates are that GDP growth will accelerate at a 20% annualized rate in Q3.
There are some arguments being made that a positive GDP report in Q3 will mark the end of the recession that the National Bureau of Economic Research (NBER) said started at the end of February. This argument is based partially on the belief that recessions are defined as two consecutive quarters of declining GDP growth and that the positive growth rate in Q3 would signal the bottom has been reached in most data sets that impact GDP growth.
NBER does not formally define recessions based on GDP growth, but rather includes other calculations like real income, employment, industrial production, and wholesale-retail sales. When determining whether a recession has ended, these inputs would need to return to a level where they are no longer detracting from economic activity. Based on the steep declines that have occurred in the second quarter, there is no guarantee that these data points will be contributing positively on a sustained basis in the second half of 2020 (especially income which has been impacted by the increase in fiscal policy support).
There is historical precedent for positive GDP quarters occurring during an ongoing recession. Research firm Rosenberg Research recently noted that in all 11 recessions since 1948, there have been at least one quarter of positive quarter-over-quarter (q/q) GDP growth, and on average two of the five quarters during recessions have positive growth. These include the two most recent recessions and some of the larger ones in the 1970s and 1980s.
While seeing positive GDP growth in Q3 would be an encouraging sign, based on history and the size of the decline in economic activity in Q2, it is likely too early to call the end of the recession.
Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC
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