Record Growth is Not Good Enough

Real GDP jumped at a record-breaking 33.1% annualized pace in the third quarter, but remained 3.5% below the peak the economy hit in the fourth quarter of 2019. That is close to the worst loss, 4%, that we suffered during the depths of the Great Recession in 2008-09.

Gains in overall growth were driven by a nearly 60% surge in residential investment and a more than 40% jump in consumer spending. Mortgage applications remained above year-ago levels in October but have come off the highs that we saw earlier in the year. The bulk of the recovery in consumer spending occurred in May and June as the economy reopened. Momentum slowed during the summer when COVID cases and hospitalizations surged in the Sunbelt and much of the aid provided to households by the CARES Act lapsed.

Business investment posted solid gains but was still down 4.9% from its already weak precrisis level. The trade war with China suppressed investment gains in 2019. Robust gains in equipment spending offset a sharp drop in commercial real estate construction during the quarter. Inventories that were drained during lockdowns were rebuilt, but not as much as expected. Retailers have reported being more conservative about ordering for the holiday season so that they would not be stuck with an overhang of inventories and discounting associated with lockdowns, in the event of a resurgence of cases this fall.

Government spending contracted. Spending by the federal government dropped with the lapse in aid provided by the CARES Act. Spending at the state and local levels fell as government offices struggled to fully reopen and budget cuts started to kick in. Most state and local fiscal years started on July 1 and were hit by the loss in sales and income tax revenues triggered by COVID. This underscores the need for federal transfers to the states, which do not appear to be forthcoming.

The trade deficit widened further as imports came back even faster than exports. That reflects the rebound in spending and earlier reopenings we saw in the U.S. relative to our trading partners. Sadly, case counts have surged again in Europe, where countries including Germany and France have initiated new lockdowns and curfews. This will take a toll on exports in the fourth quarter.

Bottom Line
Record gains are not enough to dig us out of the hole created by COVID. Prospects for growth in the fourth quarter are deteriorating. Both consumers and businesses pull back when cases are surging. Wall Street appears to have finally gotten the message. Much rides on whether a lame duck Senate will hear the economy’s cries as well. Without more stimulus, there will not be as much of a foundation to rebuild on, once the crisis passes.

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