Econ­omy grew 33.1% but slow­down emerges

Con­sumer spend­ing has re­bounded but surges in COVID-19 cases, po­lit­i­cal dead­lock prove to be stum­bling blocks

USA TODAY US Edition - - MONEY + LIFE - Paul David­son

The U.S. econ­omy grew at a record pace in the third quar­ter, bounc­ing back from an un­prece­dented COVID-19-in­duced nose­dive early in the year, but ac­tiv­ity has slowed re­cently as the pan­demic surges and Congress re­mains dead­locked over new re­lief.

The na­tion’s gross do­mes­tic prod­uct, the value of all goods and ser­vices pro­duced in the U.S., in­creased at a sea­son­ally ad­justed an­nual rate of 33.1% in the July-Septem­ber pe­riod as con­sumer and busi­ness spend­ing soared, the Com­merce Depart­ment said Thurs­day. Econ­o­mists sur­veyed by Bloomberg had fore­cast a 32% jump in GDP.

The re­port comes amid this week’s big mar­ket sell-off and just five days be­fore an elec­tion that Pres­i­dent Don­ald Trump has at­tempted to frame as a ref­er­en­dum on his stew­ard­ship of the econ­omy rather than his han­dling of the health cri­sis.

The his­toric leap in out­put marks the econ­omy’s best quar­terly per­for­mance since a 16.7% rise in early 1950 and seem­ingly of­fers a mir­ror im­age of the 31.4% an­nu­al­ized de­cline in the sec­ond quar­ter – when ac­tiv­ity at restau­rants, malls, movie the­aters and other out­lets ground to a near-halt amid state busi­ness shut­downs.

But while busi­ness re­open­ings fueled a vig­or­ous re­bound, it doesn’t off­set the pre­vi­ous loss be­cause the econ­omy was smaller af­ter the big drop. The na­tion’s third-quar­ter GDP was still about 3.5% (non-an­nu­al­ized) be­low its pre-virus level in late 2019. GDP isn’t ex­pected to re­turn to its pre-pan­demic level un­til late next year, ac­cord­ing to econ­o­mist Gus Faucher of PNC Fi­nan­cial Ser­vices Group.

“We an­tic­i­pate a much slower sec­ond phase of the re­cov­ery,” says econ­o­mist Gregory Daco of Ox­ford Eco­nomics, adding that the econ­omy has re­couped about two-thirds of its lost out­put.

And the num­bers are skewed by strong gains in May and June, when states be­gan al­low­ing many busi­nesses to restart in phases. That lifted eco­nomic out­put to a level that pushed up the av­er­age in­crease for the third quar­ter

“We an­tic­i­pate a much slower sec­ond phase of the re­cov­ery.”

Gregory Daco Ox­ford Eco­nomics

com­pared with the pre­vi­ous three­month pe­riod.

Growth, though, has slowed the past few months amid COVID-19 spikes. Twenty states re­cently set records for new cases in a week and, ac­cord­ing to Pan­theon Macroe­co­nomics, the share of Amer­i­cans test­ing pos­i­tive for the virus has climbed steadily the past month. About a dozen states have re­in­stated busi­ness re­stric­tions or sus­pended plans to ease them.

The num­bers of open small busi­nesses, em­ploy­ees work­ing and hours logged all have been roughly flat since July, ac­cord­ing to Home­base, which makes em­ployee sched­ul­ing soft­ware.

Some firms, es­pe­cially in hard-hit in­dus­tries such as busi­ness travel and event plan­ning, have closed for good or down­sized amid dim prospects. The na­tion has re­cov­ered slightly more than half the 22.2 mil­lion jobs shed in April and May as busi­nesses re­opened and brought back fur­loughed work­ers. But job growth has slowed steadily since June and re­coup­ing the rest of the lost jobs is likely to be a tougher slog, econ­o­mists say.

Bar­clays es­ti­mates eco­nomic growth will slow to 2.5% in the fourth quar­ter, says Jonathan Mil­lar, di­rec­tor of U.S. eco­nomic re­search at the firm.

Congress was sup­posed to step in with an­other big stim­u­lus mea­sure to fund small busi­nesses in the mean­time; send an­other round of $1,200 checks to most house­holds; and re­new much of a $600 weekly sup­ple­ment to state un­em­ploy­ment ben­e­fits. But the chance of a re­lief pack­age be­fore the elec­tion are close to nil.

The dead­lock and virus flare-ups have spooked Wall Street, with the Stan­dard & Poor’s 500 in­dex down 5.6% so far this week.

Ser­gio’s Fam­ily Restau­rants, with six Cuban eater­ies in Mi­ami-Dade and Broward coun­ties, saw sales plunge 75% when the chain could pro­vide only take­out and de­liv­ery in early spring, Pres­i­dent Car­los Gaz­i­tua says.

Af­ter out­door din­ing was al­lowed, rev­enue climbed to half of pre-pan­demic lev­els by Au­gust, but the com­pany was still los­ing money, even with a $1 mil­lion for­giv­able fed­eral loan, Gaz­i­tua says.

With­out an­other fed­eral Pay­ment Pro­tec­tion Pro­gram loan, he says the fam­ily-owned busi­ness will weigh clos­ing restau­rants and lay­ing off work­ers.

Con­sumer spend­ing sky­rock­ets

Con­sumer spend­ing jumped 40.7%, the largest in­crease on record, af­ter tum­bling 33.2% in the sec­ond quar­ter. Con­sump­tion has been re­cov­er­ing since restau­rants, malls, movie the­aters and other busi­nesses be­gan re­open­ing.

Al­though the $600 bonus in job­less checks ex­pired in late July, house­hold spend­ing likely has been sus­tained by the huge sav­ings Amer­i­cans built in the spring, TD Eco­nomics says. Give some credit to ex­tra un­em­ploy­ment ben­e­fits and $1,200 stim­u­lus checks.

But with­out an­other re­lief pack­age, that cash re­serve is set to run dry, dim­ming prospects for con­sump­tion in the months ahead, says econ­o­mist Bob Schwartz of Ox­ford Eco­nomics.

Con­sumer spend­ing makes up about 70% of eco­nomic ac­tiv­ity.

Busi­ness in­vest­ment rises surges

Busi­ness in­vest­ment jumped 20.3%, the largest quar­terly uptick since 1983, af­ter a 27.2% drop in the first quar­ter.

Spend­ing on equip­ment such as com­put­ers and fac­tory equip­ment climbed an eye-pop­ping 70.1%, while out­lays on build­ings, oil rigs and other struc­tures de­clined 14.6%.

Many busi­nesses are buy­ing tech­nol­ogy for em­ploy­ees to work re­motely, among other equip­ment, Mil­lar says.

Res­i­den­tial in­vest­ment higher

Hous­ing con­struc­tion and ren­o­va­tion rose 59.3% af­ter a 64.4% plunge in the sec­ond quar­ter. The out­break tem­po­rar­ily halted con­struc­tion, but home sales are boom­ing as many Amer­i­cans move to less crowded sub­ur­ban ar­eas amid the pan­demic and take ad­van­tage of his­tor­i­cally low mort­gage rates.

Com­pa­nies add to in­ven­to­ries

Busi­nesses re­plen­ished their stock­piles as sales bounced back af­ter draw­ing them down the prior quar­ter amid sharply re­duced de­mand, con­tribut­ing nearly 7 per­cent­age points to the in­crease in GDP.

Trade hurts growth

Ex­ports and im­ports both shot higher, re­bound­ing from sharp sec­ondquar­ter de­clines, as both the U.S. and other coun­tries al­lowed busi­nesses to re­open. But im­ports nearly dou­bled while ex­ports rose 59.7%, widen­ing the na­tion’s trade deficit and sub­tract­ing about 3 per­cent­age points from growth.

Govern­ment spend­ing

Govern­ment spend­ing fell 4.5% on drops in fed­eral, state and lo­cal out­lays. Non­de­fense fed­eral spend­ing tum­bled 18.1% af­ter stim­u­lus-re­lated out­lays juiced sec­ond-quar­ter ex­pen­di­tures.

Bot­tom line

The econ­omy’s record-shat­ter­ing re­bound last quar­ter met ex­pec­ta­tions, but out­put re­mains be­low pre-pan­demic lev­els and the re­cov­ery is ex­pected to slow sig­nif­i­cantly amid COVID-19 spikes and govern­ment re­straints.

The come­back now hinges on the un­cer­tain course of the virus, devel­op­ment of a vac­cine and law­mak­ers’ abil­ity to pro­vide fur­ther aid to strug­gling house­holds and busi­nesses, says econ­o­mist Les­lie Pre­ston of TD Eco­nomics.

With­out an­other re­lief pack­age, cash re­serves are set to run dry, dim­ming prospects for con­sump­tion, says econ­o­mist Bob Schwartz of Ox­ford Eco­nomics.

CHRIS­TIAN PETERSEN/GETTY IM­AGES

Con­sumer spend­ing has risen sharply and un­der­pinned eco­nomic growth in re­cent months.

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