October 27, 2020
While we are virtually certain to see record growth for GDP in the third quarter, without a new stimulus package a drop is likely in the fourth quarter.
We are virtually certain to see a record growth figure for GDP in the third quarter, likely close to 35 percent at an annual rate. The sharp growth is a bounce back from a record plunge in the second quarter, which followed a sharp drop in the first quarter, when the shutdown measures first started to go into effect.
While this sort of bounce back following the shutdowns is encouraging, it still does not get the economy anywhere close to being back on track. The economy would have to grow at a 53.3 percent annual rate in the third quarter to make up the ground lost in the first and second quarters. If we assumed a modest 2.0 percent growth path, then we would need to see a 62.7 percent annual growth rate to get the economy back to its pre-pandemic growth path.
There will be sharp differences across sectors in the extent of the recovery.
While it would take annualized growth of 60.7 percent to make up the drop in consumption over the last two quarters, goods would only need a 12.0 percent increase, compared to a 90.5 percent increase in expenditures on services. It is likely that we will actually be well above the pre-pandemic level of spending on goods, as we have seen strong spending on cars and also store-bought food, as a replacement for restaurant food.
On the other hand, consumption of services such as health care, transportation, recreation, and restaurants, was very hard hit. It would take annual growth rates of over 100 percent from the second quarter levels to make up the ground lost in these sectors. While we are likely to see very strong growth in all four categories, we will almost certainly still be far below the pre-pandemic level.
Investment is likely to show a mixed picture.
Equipment investment has been coming back. We will see strong growth for the quarter, but will still not be anywhere near the levels of the fourth quarter of last year. Nonresidential construction is likely to show a further decline from the second quarter, as construction of office and retail buildings is slumping. By contrast, residential construction will be very strong, as low interest rates and people choosing to move due to the increased ability to work remotely is leading to a building boom.
The trade deficit is virtually certain to show an increase.
Both exports and imports have plummeted since the pandemic, but US exports have been harder hit. This is true for both trade in goods and services. The latter has fallen sharply due to reduced international travel since the US had a large pre-pandemic surplus in this area. Trade will almost certainly be a large drag on growth in the third quarter.
We are likely to see a fallback in the third quarter in state and local government spending.
Government spending had largely held up in the first and second quarters, but as state and local governments are forced to reduce spending in response to budget crunches there will almost certainly be sharper cutbacks in the fourth quarter unless Congress can quickly pass a new stimulus package.
The biggest issue here is the pace of the economy going forward.
We were seeing very rapid growth at the start of the quarter as the shutdowns came to an end in June and July. However, growth slowed sharply in August and September, as most of the businesses that had the financial ability to reopen had already done so. Also, when the $600 weekly unemployment insurance supplement ended at the start of August, many households with unemployed workers had much less money to spend.
The economy has likely slowed further in October, as the initial supplements, plus the smaller supplements put in place by the Trump administration, have come to an end. Also, the renewed spread of the pandemic is again forcing many businesses to reduce their operations.
While the strong growth we will see in the third quarter report is good news, it still leaves us quite far from making up the ground we lost with the shutdowns. Furthermore, with the impetus from the CARES Act package largely faded, the growth prospects for the fourth quarter look bleak. With a growing trade deficit, increased spread of the pandemic, and cutbacks by state and local governments, it is very likely that we will see a fourth quarter drop in GDP without a new stimulus package.
The Gross Domestic Product, 3rd Quarter 2020 (Advance Estimate) is scheduled for release by the Bureau of Economic Analysis on Thursday, October 29 at 8:30 AM Eastern Time. CEPR produces same-day analyses of government data on inflation, employment, GDP and other topics.
Follow @DeanBaker13 on Twitter to get his quick-take analysis of government data immediately upon release.