Record GDP Surge to Mask Moderation in U.S. Economic Rebound

The U.S. is about to report the fastest quarterly growth on record after businesses reopened following pandemic shutdowns and consumers proved resilient.

But the headline number, like the record contraction preceding it, obscures key parts of the story.

Data due Thursday are forecast to show U.S. gross domestic product surged an annualized 32% in the third quarter, almost double the previous high. That figure will reflect activity switching back on across the country after Covid-19 fears and government stay-at-home orders ground the economy to a halt in April.

The eye-popping number, though, fails to capture the fact that the pace of growth has moderated significantly since early in the recovery. Overall economic activity will likely remain below its pre-pandemic level for some time, even though some sectors such as retail sales and housing have made comebacks.

In addition, the economy currently faces tough challenges including a fresh surge in new Covid-19 cases, rising long-term unemployment and a lack of additional government stimulus.

The report comes out five days before Election Day. While it’s unclear how much it will help President Donald Trump, especially since more than 69 million Americans have alreadyvoted, there’s a good chance Trump and his surrogates will highlight the GDP number as evidence of the president’s economic stewardship.

Here are some questions and answers about the report:

Does this mean GDP has fully recovered?

No. Bloomberg Economics estimates the outsize rebound will still leave the U.S. economy’s size almost 4% below its pre-crisis peak.

Michael Gapen, chief U.S. economist at Barclays Plc, doesn’t expect a full recovery in the level of GDP until the first quarter of 2022.

The headline number also overstates the actual change in economic output because it represents an annualized rate — or what the quarterly change would be if it lasted a full year.

A 32% annualized growth rate would actually be derived from a quarterly increase of about 7.2%. That compares with a 9% decline in the second quarter — or an annualized contraction of 31.4%.

Before the crisis, the economy was usually growing by a few tenths of a percentage point each quarter, resulting in an annualized pace typically ranging from 2% to 3%.

What’s driving the increase?

A resurgence in consumer spending. Personal consumption is estimated to jump an annualized 38.9% after plummeting 33.2% in the prior period.

Consumer spending accounts for about two-thirds of GDP and is typically driven by spending on services — like health care, travel and dining out.

While health risks from Covid-19 have severely curbed such spending, Americans have used some of their dollars elsewhere.

“The unique feature of the rebound, in my opinion, has been the compositional shift — or how quickly households substituted away from services spending toward goods spending,” Gapen said.

Purchases of cars, furniture, and sporting goods as well as spending at grocery stores and nonstore retailers like Amazon.com Inc. are above pre-pandemic levels. But spending on overall services remains depressed.

Other categories are also poised to support growth, including a booming housing market and a rebound in business investment. Meanwhile, a wider trade deficit will weigh on the headline figure. Government spending may be a wild card, with economists’ estimates varying.

Was growth that strong over the entire quarter?

Not so much. It’s important to remember the reported level of GDP is a three-month average of economic activity, adjusted for seasonal fluctuations and annualized. That is then compared to the prior quarter’s three-month average to get the growth rate.

In fact, the third-quarter growth number will largely reflect the widespread business reopenings that began back in April and May, rather than the more-modest economic gains seen in September.

“In this environment, the quarterly numbers in a way mask a lot of movements that are happening on a monthly and even on a weekly basis given how quickly the economy changed in the face of the Covid shock,” said Michelle Meyer, head of U.S. economics at Bank of America Corp.

The beginning of the quarter matters most, “so because the second quarter showed a recovery throughout the quarter, the third quarter started on a healthier footing,” Meyer said.

What’s the outlook from here?

GDP growth is projected to slow sharply, to 4% in the October-December period, according to a Bloombergsurvey of economists in early October.

The trajectory of spending growth — with most of the strength likely concentrated in the beginning of the third quarter — “will confirm a significant slowdown going into the final quarter of the year,” wrote Bloomberg economists Yelena Shulyatyeva, Andrew Husby and Eliza Winger.

Meantime, lawmakers have yet to reach an agreement on a new large stimulus package after three months of negotiations. And colder weather and a recent surge in Covid-19 cases threaten to weigh on growth further.

While Gapen expects growth to moderate in the coming quarters to a more typical pace, “we’re not saying we expect the economy to roll over,” he said.

— With assistance by Chris Middleton

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