Economy’s initial comeback was strong but spreading virus, no stimulus raise doubts about recovery


A contractor drills a wood stud while framing a home under construction Park City, Utah, on Friday, Aug. 14, 2020.

George Frey | Bloomberg | Getty Images

The U.S. economy was stronger than expected in the third quarter, but its recovery is still lumpy and economists are divided on how long it will take to get out of the deep hole created by the pandemic.

The economy’s recovery has become complicated by a new wave of the virus spreading at a record rate, and the failure of Congress to provide a stimulus package to help the economy heal.

The discussion among Wall Street economists echoes the debate in Washington. Some economists say real gross domestic product could return to its late 2019 level by spring, and others say without stimulus it may take even beyond next year.

U.S. GDP grew at a record 33.1% annualized pace in the third quarter, better than the 32% expected. Stronger consumer activity and business and residential investment helped drive the surge, after the record 31.4% contraction in the second quarter. In level terms, GDP is now 3.5% below its fourth quarter 2019 peak.

Overall U.S gross domestic product has regained $1.3 trillion of the $2 trillion lost, according to Jefferies. “Although Q3 growth was truly impressive, recouping the remaining $700 billion of lost GDP will take quite a bit longer. We expect growth to slow to just 2% in Q4, with downside,” notes Jefferies chief economist Aneta Markowska.

Markowska said the economic rebound lost steam over the summer months, and it appears momentum carried over from May and June before slowing in July. “The outlook for Q4 is very shaky in our view,” she wrote, noting that the end of stimulus spending from Washington could stall consumption growth in the fourth quarter.

That could be offset by inventory rebuilding and strength in housing, but there are risks to the forecast should new Covid infections cause more school and business closings, she added.

Back to 2019 level?

However, Stephen Stanley, chief economist at Amherst Pierpont, said he is actually upping his fourth quarter growth forecast to 9% from 8.5%, after seeing the leaner than expected inventories and larger trade gap in the the third quarter. He said inventories were about flat in the third quarter, after a massive liquidation in the second quarter, clearing the way for a rebuild in the fourth quarter that should help growth.

“I’ve got GDP getting back to fourth quarter 2019 levels in the first quarter of 2021, but it very well could be the second quarter. That puts me a quarter or two ahead of most people,” he said.

Grant Thornton economist Diane Swonk said the only way GDP could return to its peak level before the end of next year would be with help from a large stimulus package. Democrats had pushed for a more than $2 trillion package, which Senate Republicans opposed.

“What’s unclear is how much a toll the surge in cases and hospitalizations will take on November and December,” said Swonk.

Swonk said she doesn’t expect GDP to return to its peak until the end of next year, but she does not expect the labor market to recover until 2023. Without stimulus, it would be 2024.

“You’re talking about really much deeper scars on the complexion of the labor market,” she said. However, if there were to be a $2 trillion stimulus package before year end, GDP could return to its prior level by second quarter, even if parts of the economy are not fully reopened.

Consumers carrying economy

Consumers were responsible for a big part of the bounce in the third quarter. Stanley said consumers are still stronger than some economists give them credit for.

Consumer spending rose by 40.7% annualized in the third quarter, better than the consensus forecast of 39%. “People have been throwing shade on the consumer since the summer, but consumer spending has continued to outperform, and I expect that has continued at least into the early part of Q4,” Stanley noted.

Stanley said some economists cut their fourth quarter GDP forecasts when it became clear Washington could not put together a stimulus package before the election, casting doubt on whether one could be agreed to before next year.

The previous stimulus included a one-time payment to households; an added $600 a week for those on unemployment; payments to businesses to support their payrolls, and aid to state and local governments. It also included a special unemployment program for gig workers and the self-insured which expires at year end.

He said there should be aid to help the unemployed, but he doesn’t expect the economy to roll over if there is no package. “Certainly if we got a multi-trillion dollar stimulus package, it would boost growth. But I don’t think the economy is going to grind to a halt with the absence of a package,” he said.

“We continue to see households have elevated savings rates. I think people are missing that. You have this narrative that people go tall this money in the spring and they’ve been burning through that money and it’s gone. I think that is definitely true in a lot of individual cases…In the aggregate, it’s simply not true. The savings rate in the third quarter was over 15%.”

In the GDP report itself, housing was an area of strength, up 59.3% annualized, and business equipment spending rose 70.1%.

White House economist Joseph LaVorgna said the GDP data shows the economy is recovering faster than many forecasters expected.

“Based on the economy’s underlying momentum and forward indicators of activity such as housing and autos, we could very well return to our pre-pandemic level of output in the early spring,” said LaVorgna, chief economist for the National Economic Council.

He said the capital spending cycle started to turn up early in the year and now will get a boost because the economy is fundamentally healthy and there is pent-up demand.

“My guess is on the spending side, people will continue to spend on retail goods. There may be spending away from services, more towards goods, less travel of course. It seems to me the economy has a lot of underlying momentum,” said LaVorgna.



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