Monthly Market Commentary

February 1st, 2022

GDP – A Narrowing Growth Gap

Philip Blancato, Chief Market Strategist, Advisor Group

In 2020 the coronavirus pandemic caused governments around the world to implement lockdown measures, bringing economic activity to a near standstill. As the months and years have passed since the onset of the pandemic, the economic damage is evident. Therefore, we have taken a deeper look to see where US economic growth potentially would have been had the pandemic never occurred.

Steps taken to conduct this study:

  1. We looked at the average growth of GDP, in dollar terms per quarter, over the last 10 years, before GDP was impacted by the pandemic (Q4 2009 – Q4 2019). 1
    a. Over that time period, the average growth in dollar terms per quarter was ~97 billion (~2.3%).1
  2. We then used this average to estimate what GDP could have grown by, in dollar terms each quarter, had the pandemic never happened.
    a. For example, as shown in the below chart, the pandemic caused Q1 2020 GDP to decrease by $250 billion on a quarter-overquarter basis (~5.11%). As a result, GDP for the quarter ended at ~$18,951 billion, in dollar terms.
    i. Using the average quarterly growth rate for the prior 10 years, presented above, we can estimate that had the pandemic not occurred, GDP would have instead grown by ~$97 billion and ended the quarter at $19,299 billion. 1
  3. Lastly, we assumed consistent growth since Q1 2020 and applied this $97 billion quarterly growth estimate to each subsequent quarter to come to the hypothetical conclusion that GDP is ~$174 billion below the level it could have been without the pandemic impact. 1

Chart 1


Takeaway1: While $174 billion may seem like a lot to make up for, in themore commonly used percentage terms, this is equal to one quarter of~3.56% GDP growth. Keeping in mind that the pre-pandemic averagegrowth was ~2.31%, this would mean we would need an additional~3.56% of GDP growth on top of the average. Therefore, we would need~5.59% GDP growth next quarter (vs. the pre-pandemic average of 2.31%growth) to get back to where our potential output could have been hadthe pandemic never happened. This is equal to ~1.80% above averagegrowth over the next two quarters, or ~0.90% above average growthover the next four quarters. During the fourth quarter of 2021, we sawGDP growth come in stronger than expected at 6.89%. Looking at it fromthis perspective, we can see that in 2022 economic growth is very likelyto fully recover the losses experienced from the largest economic shockthe world has experienced in decades. By the end of 2022 we could seenew record levels of growth, proving that we are in an environment ofstrong economic fundamentals and supporting our view of maintaining aslightly overweight equity positioning in our portfolios.


Chart 2:2


Economic Definitions

GDP: GDP serves as a gauge of our economy’s overall size and health. GDP measures the total market value (gross) of all U.S. (domestic) goods and services produced (product) in a given year. When compared with prior periods, GDP tells us whether the economy is expanding by producing more goods and services or contracting due to less output. It also tells us how the U.S. is performing relative to other economies around the world. Economic growth rates are monitored closely, which is why GDP is often reported as a percentage. Reported rates are typically based on “real GDP,” which is adjusted to eliminate the effects of inflation.


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1 https://fred.stlouisfed.org
2 https://www.wsj.com/articles/consumers-get-more-pessimistic-as-inflation-looms-11643711412

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