Record Setting GDP Report Confirms Explosive Third Quarter – November 2, 2020

The U.S. BEA reported Gross Domestic Product (GDP), which is the broadest measure of the value of goods and services for the economy, expanded at a record 33.1% annualized pace in the third quarter. It easily topped the prior record of 16.7% set in Q1 1950.

While the economy has yet to fully recover from the effects of the pandemic, Figure 1 confirms economic activity has made up significant ground.

The impressive rebound can be traced to the basics. Businesses began to reopen, workers came back to work, output increased, and consumers, which benefited from cash provided by fiscal stimulus, started spending again.

Let’s take a brief look at some of the numbers under the GDP hood. Consumer spending accounts for nearly 70% of GDP. In Q3, consumer spending rose at an annual pace of 40.7%.

The good news: durable goods, which include autos, home furnishings, and recreational goods and vehicles, soared at an annual pace of 82%.

However, spending on services is still being hampered by social distancing restrictions and the virus. Impacted industries include travel, airlines, hotels, and any type of event that might require the gathering of large crowds; think movies, concerts, and sports.

Even health care spending, which averaged roughly 5% annual growth in the last decade, is down 3.2% vs one year ago, according to the St. Louis Federal Reserve. Fear of close contact at the dentist or doctor’s office and fewer elective procedures appear to be playing a role.

This is important because health care spending accounted for 13% of GDP in Q3, according to the U.S. BEA.

Figure 2 illustrates that spending on services is down sharply from pre-Covid levels. Notably, it had accounted for roughly 45% of GDP pre-pandemic.

In prior recessions, the more stable service sector helped cushion downturns. Today, the pandemic’s grip on services creates a stronger headwind for the economy.

Bottom line, we’re not back to pre-pandemic levels of activity, and investors are expecting additional government support for the economy.

Still, this was an excellent report. While I highlighted some of the troubled sectors, I don’t want to diminish the fact that the economy did much better than nearly everyone was forecasting a few months ago.

We won’t continue to grow at Q3’s pace. That’s not possible. However, leading economic indicators are currently signaling that we’ll see modest gains in the fourth quarter.

Created 2020-11-02 20:12:44