U.S. GDP Contracts By 32.9% – Is It That Bad?

Financial markets had a huge reaction yesterday in the aftermath of the U.S. Advance GDP release. This is the most important GDP release as it is the earliest out of the three versions of GDP data released one month apart.

It showed that the U.S. economy shrunk by -32.9% in the second quarter, sending a wave of USD selling in the FX market. Also, American stock indices headed lower on the release, sparking fears of a risk-off day.

Overall Data Not So Bad as the Headline Suggests

One of the biggest problems when trading financial markets is to be aware of other market participants. Just because a trader has a strategy based on interpreting fundamental analysis, it does not mean that the market will react the way it is supposed to. That is the case because many market participants do not fully distinguish the implications of specific economic data.

Yesterday’s GDP release and the market’s reaction speaks of itself. This is a classic situation seen very often in financial markets – one of the reasons why the market often makes irrational moves.

The GDP release was not that bad as the headline suggests. The data in the Advanced GDP release shows the annualized growth rate. As such, the GDP would shrink by 32.9% only if it contracts at the same rate for four consecutive quarters!

As it did not, the current annualized release suggests that the U.S. economy shrunk by a mere 10% in the second quarter. Putting differently, in a more optimistic tone, the economy was strong enough to produce 90% of the output produced pre-crisis – a staggering number considering all the lockdowns in many American states and businesses that closed their doors.

If we add to this the fact that the quarterly change in business investment is not out of line with past economic recessions, we might say that the GDP data was actually surprisingly better. Yet, this did not stop investors from trashing the USD across the board.

The stock market, however, recovered later towards the close of the trading session, as the big tech giants were expected to release their Q2 2020 earnings. As for the USD, it continued on a downward path started earlier in the month, and the GDP headline was just another excuse to sell some more.

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