January 30, 2009 12:15PM

GDP Is Down 1% — Not 3.8%

The preliminary GDP estimate for the fourth quarter of 2008 is $11,599.4 billion (in 2000 dollars). That was 0.965% smaller than the third quarter — a figure commonly multiplied by four to convert it into a more dramatic 3.8% annual rate. But these quarterly rates are highly erratic, even in recessions, so converting them into compound annual rates is misleading if not foolhardy.

The table  below compares recent quarterly GDP figures with those of 2000-2001.

The first quarter of 2001 and second quarter of 2008 look no worse than the third quarter of 2000.  The second quarter of 2008 was stronger than the fourth quarter of 2000. Yet the entire years of 2001 and 2008 are labeled recessionary and 2000 is not.

Percentage Changes in Real GDP

    Quarterly Annualized
2000 III -0.115 -0.5%
2000 IV 0.52 2.1%
2001 I -0.123 -0.5%
2001 II 0.307 1.2%
2001 III -0.352 -1.4%
2001 IV 0.395 1.6%
2008 II 0.699 2.8%
2008 III -0.127 -0.5%
2008 IV -0.965 -3.8%


Looking at any extended period, such as the 2000-2001 figures or the 2008 figures, shows why annualized quarterly changes are a very poor guide to future trends. It makes no more sense to use this figure to suggest the economy will keep falling at a 3.8% rate than it would have been to cite the second quarter figure as evidence the economy would keep rising at a 2.8% rate.

The annualized fall in GDP in the first quarter of 1982 was 6.4%, yet the overall drop between the peak and trough quarters of that deep recession was only 2.3%. The annualized drop in first quarter of 1975 was 4.7%, yet that overall cyclical decline was 3.1%.