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 a relief package.
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 selloff and just five days before an election that President Trump has attempted to frame as a referendum on his stewardship of the economy rather 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 prior 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 compared to the previous three-month 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 past week, Illinois Gov. J.B. Pritzker again has banned indoor dining and bar service in Chicago and several counties.
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 like 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 struggling 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 jobless benefits. But Democrats and Republicans remain at an impasse and the chance of a relief package before the election appear 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 services in early spring, says company President Carlos Gazitua. After outdoor dining was allowed, revenue gradually 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.
Since indoor dining was permitted at 50% capacity in mid-August, the chain has roughly been breaking even and subsidizing money-losing outlets with sales from profitable ones, Gazitua says. The company also came up with a way of “blast-chilling, ” or freezing, its takeout chicken and beef meals, which it’s also offering online across the country.
“It’s trying to survive,” he says. “That’s kind of the game plan.”
But without another federal loan – known as the Payment Protection Program — he says, the family-owned business will weigh closing struggling restaurants and laying off workers.
“PPP is a must,” he says. “I can take us past the flu season,” when he hopes a vaccine will be widely available.
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 in the spring.
Although the $600 bonus in unemployment 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 jobless 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 increase 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 vaults higher
Housing construction and renovation rose 59.3% after a 64.4% plunge in the second quarter. The outbreak temporarily suspended construction but home sales are booming as many Americans move to less crowded suburban areas during the pandemic and take advantage of historically low mortgage rates.
Housing is the economy’s biggest bright spot.
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 second-quarter declines, as both the U.S. and other countries allowed more 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 rises
Government spending fell 4.5% on drops in both federal and state and local outlays. Nondefense federal spending tumbled 18.1% after stimulus-related outlays juiced second-quarter expenditures.
And state and local government spending fell 3.3% as states and cities continued to grapple with pandemic-related costs without additional aid from the federal government.
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 related 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.