(Bloomberg) — The U.S. economy bounced back with a record yet temporary surge of growth in the third quarter as businesses reopened and stimulus cash powered consumer spending — reversing much of the collapse stemming from coronavirus lockdowns.
Just as the second-quarter plunge in output was the biggest in seven decades of data, so too was the recovery: Gross domestic product grew 7.4% from the prior period, a quarterly gain that equals an annualized pace of 33.1%, the Commerce Department’s initial estimate showed Thursday.
The figure topped economists’ estimates for a 32% increase, which was already well above forecasts three months ago for an 18% gain. Personal spending fueled the surge in growth, climbing an annualized 40.7%, also a record, while business investment and housing also posted strong increases.
While the report makes clear that the economy has found a solid footing for now, analysts caution that growth will be much more modest and choppy in months to come, especially as the spread of the virus gathers pace again and lawmakers remain in an extended deadlock over a new stimulus package.
Moreover, there are still nearly 11 million fewer workers on payrolls than there were before the pandemic hit, and analysts say a full recovery in GDP is at least several quarters away.
“To the extent that reopening drove the strength in Q3, not only have we already reopened but we may partially close a few things,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. “That’s really the elephant in the room when it comes to thinking about Q4.”
Even with the outsize gain, GDP is 3.5% below its pre-pandemic peak, and the virus will keep business and jobs depressed in sectors like travel and restaurants.
What Bloomberg’s Economists Say…
“Much of the third-quarter strength was concentrated in the beginning of the period; a significant slowdown has emerged since then. Bloomberg Economics expects a weak patch through the first quarter — driven by the impact of elevated Covid-19 transmission on behavior, and lapsed fiscal aid — and a return to the pre-pandemic level of GDP in the fourth quarter of 2021.”
— Andrew Husby, economist
With just five days until Election Day, President Donald Trump is counting on the figures to give him a badly needed boost. He tweeted Thursday that the number is the “Biggest and Best in the History of our Country” and said Democratic challenger Joe Biden would implement tax increases that “would kill it all.”
It’s unclear, though, how much of an impact the upbeat figures may have on the election, especially given more than 77 million Americans have already cast their vote.
Biden, for his part, issued a statement saying the recovery “is slowing if not stalling,” as well as “helping those at the top, but leaving tens of millions of working families and small businesses behind.”
The S&P 500 fluctuated at the open following steep losses over the last three days. A separate report showed applications for U.S. state unemployment benefits fell more than forecast last week. The yield on 10-year Treasuries was little changed and the dollar rose.
The third-quarter rise spanned most categories. Residential investment jumped 59.3%, the fastest since 1983, reflecting a recent boom in the housing market, supported by record-low mortgage rates.
Business investment rose 20.3%, though that was driven by equipment, as structures and intellectual property both showed declines.
The rebuilding of inventories added 6.6 percentage points to the quarterly growth pace, and will likely continue to be a prop in the current quarter as companies add to stockpiles that were whittled down during lockdowns.
The pandemic’s impact on Americans’ spending patterns was also clear from the report. Consumer spending typically makes up about two-thirds of GDP.
Goods spending was above pre-pandemic levels, driven by increases in motor vehicles and apparel. Services gained on rebounds in health care and food services and accommodations, but overall outlays remained shy of levels seen at the end of last year.
Meanwhile, net exports subtracted 3.1 percentage points from growth as the trade deficit widened. Government spending was a 0.7 point drag, due to nondefense and state and local outlays.
The third-quarter figures are also in line with generally solid corporate reports during the latest corporate earnings season. So far, about 85% of companies in the S&P 500 have beaten analysts’ earnings estimates, including General Electric Co. and Microsoft Corp.
This is the first estimate of three for the third-quarter figures, and the figure will likely be revised over the next two months as the Bureau of Economic Analysis receives further data.
(Adds economist’s comment in sixth paragraph, Trump tweet.)
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