The U.S. economy likely experienced record growth in the third quarter as more than $3 trillion in federal pandemic relief spending fueled historic consumer spending, but the deep scars from the COVID-19 recession could take a year or more to heal.
No one disputes that the Commerce Department’s report Thursday on gross domestic product – one of the last major economic scorecards before next week’s presidential election – will be one for the history books. Nonetheless, it will do little to mitigate the human tragedy inflicted by the coronavirus pandemic, with tens of millions Americans still unemployed and more than 222,000 dead.
With five days remaining to Election Day and trailing in most national opinion polls, President Donald Trump will probably seize on the stunning rebound in GDP as a sign of recovery following the deepest decline in at least 73 years.
Even still, it likely will leave U.S. output some 4% below its level in the fourth quarter of 2019, a fact Trump’s challenger, Democrat Joe Biden, is almost certain to highlight along with signs that the growth spurt is fast petering out.
“The figure for estimated GDP growth in the third quarter will be dramatic, and will have absolutely zero effect on the election,” said Christopher Way, associate professor of government at Cornell University. “It is economic performance in the first half of an election year that matters. For people who are still out of work or struggling with dwindling savings after the stimulus wears off, it will have little impact.”
Gross domestic product probably rebounded at a 31% annualized rate last quarter, according to a Reuters survey of economists. That would be the fastest pace since the government started keeping records in 1947 and follow a historic 31.4% rate of decline in the second quarter.
The expected surge in GDP growth would recoup a little over half of the 10.6% plunge in output in the first half of the year. By comparison, the economy contracted 4% peak to trough during the 2007-09 Great Recession.
The rescue package provided a lifeline for many businesses and the unemployed, juicing up consumer spending, which on its own is estimated to have made up about 80% of the jump in GDP.
But government funding has been depleted with no deal for another round of relief in sight, and new COVID-19 cases are spiraling across the country, forcing restrictions on businesses like restaurants. Just over half of the 22.2 million jobs lost during the pandemic have been recouped, and layoffs persist. The economy plunged into recession in February.
A separate report from the Labor Department on Thursday is likely to show 775,000 people filed for state unemployment benefits last week, according to a Reuters survey. Though claims have dropped from a record 6.867 million in March, they remain above their 665,000 peak during the Great Recession.
About 23.2 million Americans were receiving unemployment benefits in early October, though many have exhausted their eligibility for state aid. Another fiscal package is expected after the election or early next year.
“There is still a long way to go before we get back to where we were before the pandemic, probably the end of 2021,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “That assumes we get additional stimulus. Growth will slow through 2021 and the recovery will get more difficult as some structural issues with the economy persist.”
Growth estimates for the fourth quarter are below a 5% rate.
Consumer spending, which accounts for more than two-thirds of the U.S. economy, is expected to have rebounded at a rate of about 39% in the third quarter, driven by purchases of goods like motor vehicles and electronics.
Spending was boosted by billions of dollars in government transfers, including a $600 weekly unemployment subsidy and a one-off $1,200 check to households. But spending on services likely remained weak, which would leave consumer spending at least 3.5% below its fourth quarter level. Services like airline travel remain depressed.
“We cannot understate the importance of the government support for household incomes,” said James Knightley, chief international economist at ING in New York. “The $1,200 checks and the expansion of unemployment benefits meant nearly 70% of recipients received higher incomes than when they were actually working.”
The shift toward goods spending pulled in imports, likely resulting in a widening of the trade deficit. Some of the imports, however, ended up in warehouses. The accumulation of inventory likely offset the trade hit to GDP growth.
Though a turnaround is expected in business investment after the second-quarter drubbing, economists believe the bounce would be temporary as demand for goods that do not compliment life-style changes brought by COVID-19 remains weak. The pandemic has also crushed oil prices, weighing on spending on nonresidential structures like gas and oil well drilling.
Boeing Co reported its fourth straight quarterly loss on Wednesday and announced it now expected to eliminate some 30,000 jobs through buyouts, layoffs and attrition – nearly double what it initially planned – for a global workforce of around 130,000 by end-2021.
The housing market was likely another star performer, thanks to historic low interest rates. But government spending was probably a drag as transfers largely happened in the second quarter. Government spending was also likely pressured by cuts at state and local governments, whose finances have been squeezed by the coronavirus.