EconoFACTS

October 29, 2020 | 09:20

U.S. Real GDP (2020 Q3 Advance) — Great Reopening

Economist

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Bottom Line: The U.S. economy bounced back a little faster than expected in the third quarter, but recovering the remaining losses (3.5%) could take another year as the global pandemic rages.

Real GDP rebounded 33.1% annualized in Q3 after plunging 31.4% in Q2 (both postwar record moves) and dropping 5.0% in Q1. The increase beat expectations by a few percentage points. Consumers led the way with a 40.7% surge, as both goods and services snapped back sharply. However, services spending fell more than goods in the prior quarter and is still down 7.7% since late 2019. Goods spending has surpassed pre-virus levels, leaving total consumer spending down 3.3%.

Nonresidential business investment jumped 20.3% annualized, with equipment spending doing all of the leg work, up 70.1% and nearly a V-shaped rebound. However, structures spending sank another 14.6%, as demand for new office and retail space is pretty slim these days. Spending on intellectual property products fell more modestly than in the prior quarter. Overall nonresidential investment is now down 4.9% from late 2019 levels.

Two other big drivers of the Q3 gain in GDP were inventory rebuilding, which added a meaty 6.6 ppts to annualized growth, and residential construction, which popped 59.3% to exceed pre-pandemic levels...no surprise given the resilient housing market.

The two big weights holding back growth in Q3 were government spending and trade. Both federal and state/local government spending dropped a combined 4.5%, with state government finances under extreme duress. Net exports carved 3.1 ppts from GDP growth, as a 59.7% rebound in exports (all in goods) was no match for a 91.1% surge in imports (mostly goods).

On the household side, personal income fell 10.2%, erasing a third of the prior quarter's increase. Despite continued job growth, income was depressed by the fading impact of earlier government transfers (notably the CARES Act recovery rebates) and a cut in supplementary UI benefits. The savings rate dropped to 15.8% from 25.7%, still elevated due to earlier income-support programs and less spending on services such as travel and restaurants. A mountain of savings (largely held by higher-paid workers that have been less impacted by the pandemic) should help cushion an expected further decline in personal income in the current quarter.

After contracting 10.1% in the first half of the year, the Q3 rebound leaves the economy 3.5% below pre-virus quarterly levels. It could take another year to fully regain its losses, possibly longer if the global pandemic continues to escalate. We expect minimal growth in Q4 as consumer and business anxiety can only increase amid rising virus infections.

Meantime, the latest jobless claims figures suggest the labour market continues to improve but at a slowing rate. Initial claims fell by 40,000 to 751,000 in the week of October 24. Continuing claims (under regular state programs) dropped to 7.756 million for the week of October 17 from 8.465 million the prior week. The insured jobless rate keeps falling, down to 5.3% from 5.8% the previous week and May's high of 17.1%. This partly reflects some claimants shifting to the extended benefits programs (that expire at year end), though total continuing claims (all programs) continued to fall to 22.7 million in the week of October 10.

Table 1 - United States — Real GDP

(quarter/quarter % change : s.a.a.r.)

Source: BMO Economics, Haver Analytics