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  • Writer's pictureEran Peleg, CIO

Did the Economy Actually Shrink by a Third?

Media headlines screamed “US GDP fell by worst-ever 32.9% in the second quarter”.

The US economic contraction in the second quarter was very bad, and in fact, one of the worst in US history. However, in contrast to what a reader may have understood from the above headline (or ones similar to it), the US economy did not shrink by a third in a single quarter.

US GDP numbers are reported on an annualized basis. Therefore, the -32.9% growth rate really represents what would happen to the economy if it were to contract over 4 consecutive quarters by the magnitude experienced in Q2. There is very little chance that this will actually happen.

To gauge the extent of the recent drop in activity, it is probably best to look at it in terms of drawdown:

We can see that in reality, GDP dropped by around -10.5% in the first half of the year (this includes the -4.8% contraction of Q1. It wipes out several years of economic growth. It is worse than the contraction experienced in the Great Financial Crisis of 2008, but is better, or less worse, than the drop in activity seen in the Great Depression of the 1930s or the recession of 1947. Sadly, there is not much consolation in this.


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