Blowout US GDP report offers boon

But analysts predict slow recovery amid pandemic, uncertain stimulus

US economic activity grew at a record pace in the third quarter this year after a record decline amid COVID- 19 shutdowns, recovering about two- thirds of the ground the economy lost in the first half of the year to the pandemic.

With surging cases and an uncertain prospect for more fiscal stimulus from Congress, the momentum toward recovery is slowing. Analysts believe the economy will still see contraction for the whole of 2020.

US real GDP in the third quarter expanded at an annual rate of 33.1 percent, with a quarterly growth rate of 7.4 percent, the Commerce Department reported on Thursday.

Despite the seemingly fast rebound, the US Q3 economy was still down by 2.9 percent compared with that of last year, an advance estimate released by the department’s Bureau of Economic Analysis said.

Gregory Daco, the chief US economist at Oxford Economics, said on Twitter that the Q3 GDP is “record- breaking and meaningless at the same time”.

Consumer spending is 3.3 percent down from the pre- pandemic level, and business investment is 4.9 percent lower, Daco noted. Exports are down by 15.3 percent and imports declined by 7.1 percent.

He also noted that federal government spending is up by 2.6 percent from the pre- pandemic level, while state and local government spending is down 1.9 percent.

Compared with the pre- pandemic peak in the fourth quarter of 2019, the US economy is now about 3.5 percent smaller.

The rebound in the third quarter came after the economy plunged at a revised annual rate of 31.4 percent in the second quarter amid mounting fallout from COVID- 19. That is the largest decline since the US government began keeping records in 1947.

In the first quarter, the economy shrank at an annual rate of 5 percent, signaling an end to a decadelong economic expansion following the 2008 financial crisis.

The increase in the third quarter reflected increases in personal consumption expenditures, private inventory investment, exports, nonresidential fixed investment, and residential fixed investment.

The Q3 advance was driven by a “surge” in consumer spending led by the demand for goods, and a “red- hot housing market” driven by fiscally stimulated income growth and historically low interest rates, Daco said.

Jay H. Bryson, chief economist at Wells Fargo Securities, noted that consumer spending on goods has been “significantly stronger” than spending on services because services often involve close interpersonal contact.

Although real personal spending on durable and nondurable goods have both surpassed their preCOVID peaks, real spending on services remains 7.7 percent below its level in the fourth quarter of 2019, Bryson wrote in an analysis.

Diane Swonk, chief economist at Grant Thornton, a major accounting firm, said in a blog 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,” Swonk said, referring to the $ 2 trillion relief package approved by Congress in late March.

Labor market

The GDP data was released on the same day as the Labor Department reported the number of initial jobless claims in the US fell to 751,000 last week, marking the second time the number has dipped below 800,000 in the past 32 weeks.

The total number of people claiming benefits in all programs — state and federal combined — for the week ending on Oct 10 declined by 415,727, yet remained elevated at 22.65 million, indicating a slowing recovery in the labor market.

“These are remarkably elevated levels of claims,” said Mark Hamrick, senior economic analyst for Bankrate. com. “There are huge cross sections of our society and sectors within it that are suffering.”

Economists, as well as Federal Reserve officials, have repeatedly argued that more fiscal relief is needed to sustain the economic recovery, warning of dire consequences if further fiscal support is not provided in time.