Despite Third Quarter Gains, The Pandemic Economy Is Still Behind Schedule
The Commerce Department reported that the pandemic economy grew at an annualized pace of 33.1% in the third quarter. That headline figure overstates the actual growth rate, however, just as the official number for the April to June quarter showing an annualized contraction of 31.4% exaggerated the economy’s decline (Both figures describe what would have happened if quarterly trends had continued for a full year.) Economists polled by Reuters had forecast the economy expanding at a 31% rate in the July-September quarter.
However, analysts note the economy is still about 3.5% smaller than it was at the end of last year, before the once-in-a-lifetime pandemic that saw the government pour out more than $3 trillion worth of relief which fueled consumer spending. By comparison, G.D.P. shrank 4 percent over the entire year and a half of the Great Recession a decade ago and by 2.9 percent when compared with the third quarter of 2019.
The U.S. was not hit as badly as many countries this spring when seemingly the entire world went into lockdown. While the U.S. contracted 9 percent, the UK fell approximately 20 percent while, Germany 13.8 percent, and France 9.7 percent.
The economy actually grew about 7.4% during July, August and September, after shrinking 1.2% in the first three months of the year and another 9% in the second quarter. It is by far the biggest gain since reliable statistics began after World War II; the previous record was a 3.9 percent quarterly increase (16.7 percent annualized) in 1950. The rebound puts the nation’s GDP at $21.16 trillion for the three months ending in September. That’s below its level at the end of last year.
Unemployment in the Pandemic Economy
A separate report from the Labor Department on Thursday showed 751,000 people filed for state unemployment benefits in the week ending Oct. 24, compared to 791,000 in the previous period. Though claims have dropped from a record 6.867 million in March, they remain above their 665,000 peak seen during the 2007-09 Great Recession. With no further federal aid in sight this year, Goldman Sachs has slashed its growth forecast for the current fourth quarter to a 3% annual rate from 6%.
The unemployment rate stood at 7.9% last month, down from the 14.7% high recorded in April but still more than double the jobless rate in February. That means only about half the 22 million jobs that were lost in March and April have been recovered. Job gains peaked in June and have declined in each of the three months since.
Sources of Growth
Much of the GDP growth attributed to the third quarter actually came late in the second quarter. The third-quarter GDP estimates showed a 12.3 rise in investment on new homes, along with household goods such as furniture, equipment, renovations and home offices.
The quarter also showed a 40.7 percent surge in consumption, as Americans returned to spending, particularly on durable goods. Private investment rose sharply as well, 83 percent, with equipment posting strong gains.
Business investment was up a strong 20.3% last quarter, reflecting a 70.1% surge in investment in equipment. Residential investment surged at a 59.3%, reflecting a solid rebound being enjoyed by home builders as demand for homes rises. But there were other less encouraging signs: government spending fell by 4.5 per cent, and investment in structures dropped by 14.5 percent.
Wall Street Skeptical
Wall Street is growing increasingly worried about darker days ahead with the Dow tumbling 943 points, or 3.4 percent, on Wednesday on a sharp spike in Covid-19 cases in the U.S. and Europe and the lack of fresh rescue money coming out of Washington. The S&P 500 is already down 5.6% this week, on track for its worst weekly fall since March, and the Nasdaq also dropped at a similar pace, marking the biggest sell-off on Wall Street since June.
“From a numbers perspective, you would need 46 percent growth in the third quarter just to get back to where we were,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Getting the economy back to where it would have been without Covid-19 would have taken a 63 percent gain in the third quarter.”
There are signs that the recovery is losing steam. Industrial production fell in September and job growth has cooled, even as a growing list of major corporations have announced new rounds of large-scale layoffs and furloughs. Most economists expect the slowdown to worsen in the final three months of the year as virus cases rise and federal aid to households and businesses fades.