The U.S. economy grew a record 7.4 percent in the quarter ending in September and has recovered two-thirds of the ground it lost during the first half of the year. But economists remain wary, as the figures come just as the country is entering a period of rising coronavirus cases.
The data released Thursday morning by the Bureau of Economic Analysis was in line with expectations and stands in sharp contrast to the historic and devastating second quarter, when pandemic-related business closures sent it plummeting by 9 percent. As state shutdown measures eased over the summer and businesses brought people back to work, the economy and consumer spending looked vastly different, and much healthier, than they did between April and June.
But that doesn’t mean the economy has entirely healed or that the pace at which the economy recovered in the third quarter will keep up in the final stretch of 2020, especially given a surge in cases of the novel coronavirus and a hazy timeline on whether another stimulus bill may be passed.
For the economy to recover all that was lost in the previous quarter, third-quarter GDP would have had to surge by 10 percent. Put simply, the economy turned around in the third quarter. But the ongoing health crisis continues to jeopardize the recovery’s strength.
The third-quarter GDP estimates showed a rise in investment on new homes, along with household goods such as furniture, equipment, renovations and home offices. For some wealthier Americans and people working from home, turning a backyard into a socially distant place to hang out, or an extra room into an office, became a priority late in the summer.
Apart from housing-related spending, economists also expected strong gains in manufacturing, which has more than made up for pandemic-era losses. Health-care spending jumped 18 percent as people felt safer rescheduling routine appointments and surgeries.
Purchases of new cars and parts soared 17 percent. Furnishings and durable household equipment grew by 12.6 percent, and sales of clothing and footwear skyrocketed by 27.2 percent.
Constance Hunter, chief economist at KPMG, said Thursday’s data reflects the wide gap between spending on services and spending on goods. Think stationary bikes, backyard grills and cars in lieu of sporting events and concert tickets.
But those habits may not stick around for long. Hunter said that “there’s only so many fire pits and backyard furniture sets you can purchase." Plus, jobs in service sectors won’t come back until people feel comfortable rescheduling a haircut or booking a hotel room.
“If we don’t get a handle on the pandemic, services consumption is not going to rebound,” Hunter said. “And if services consumption isn’t going to rebound, we’re not going to see employment rebound, and that’s going to have spillover effects over the whole recovery.”
At an annual rate, GDP grew by 33.1 percent. But that figure isn’t relevant in a crisis as unusual as this one. The annual rate allows easy comparisons across periods, but it is built on the assumption that this quarter’s growth will continue for an entire year. That wasn’t true in the second quarter, when a 9 percent loss was reported as a 31.4 percent annualized drop, and it won’t be true in the third quarter, either.
Recessions are traditionally defined by a significant decline in economic activity spread across the whole economy for two consecutive quarters. The National Bureau of Economic Research has said the economy officially fell into a recession in February, but it will take some time before the bureau officially says when the recession has ended. Some economists speculate the economy turned around in May, as states reopened and the economy added jobs for the first time since February.
Yet the crisis continues. Approximately 23 million Americans are still on some form of unemployment benefits, and the number of new weekly jobless claims remains persistently high seven months into the pandemic. The number of people who have fallen into poverty has grown by 8 million since May, and at many businesses that have not yet reopened, furloughs are becoming permanent layoffs.
Disposable personal income fell 4.4 percent in the third quarter, after a Cares Act-assisted 10 percent rise in the second quarter. Economists fear that trend could worsen in the fourth quarter without more government aid to struggling households and businesses.
“Have we moved into a growth stage and thus out of a recession?” said Claudia Sahm, a former Federal Reserve economist and an expert on recessions. “If we are so deep in a hole still, then that switch-flipping is not that important. It does show we’re going in the right direction. With the second wave going, we might not much longer.”
As the flu season and colder weather arrive, economists and public health officials are bracing for a brutal winter. Officials such as Federal Reserve Chair Jerome H. Powell have long said that a robust and stable recovery depends on controlling the pandemic. Many parts of the country, including the Midwest, are seeing surging case counts as hospitals report a flood of coronavirus patients.
White House officials touted the GDP number and argued that President Trump’s economic policies were responsible for the “momentum” powering the economy.
“It’s a strong, strong economy. The V-shaped concept I coined awhile back looking pretty good right now,” Larry Kudlow, the president’s senior economic adviser, told Fox News.
Asked whether Trump deserved credit for the GDP report, House Speaker Nancy Pelosi (D-Calif.) said that “the Cares Act deserves credit for that,” adding that “dire circumstances” loom if there isn’t another recovery bill.
The stock market saw a small lift after Thursday’s GDP release. The Dow Jones industrial average was flat shortly before noon. The S&P 500 index was up roughly 0.6 percent, and the Nasdaq climbed 1.2 percent.
The results of next week’s presidential election should clarify how soon Congress and the White House can cut another stimulus deal. Trump on Tuesday said the White House would approve a major stimulus package after the election. But it’s unclear whether he would have the political will to sign a bill if he is not reelected or if lawmakers will make stimulus a priority in a lame-duck session.
That could mean that struggling businesses that managed to survive the third quarter might not make it to the start of next year.
“A number of small businesses are deciding — knowing that relief won’t be coming until January — whether to exist or not,” said Lisa Cook, an economist at Michigan State University. “Restaurants have to be in that situation.”
Thursday’s figures offered a blurry snapshot of the emergency aid that trickled out to struggling households and businesses, noted Ernie Tedeschi, a former Treasury Department economist and head of fiscal analysis at Evercore ISI.
At the end of July, nearly 30 million Americans saw their $600 enhanced unemployment benefits expire. Aug. 8 marked the last day that small businesses could apply for a forgivable loan through the Paycheck Protection Program. Also at the beginning of August, Trump signed four executive actions geared toward eviction protections, student loan relief and unemployment aid that would guarantee $300 per week in emergency benefits for up to six weeks.
But that timeline doesn’t mean Americans were consistently getting help from one week to the next, Tedeschi said. Many people faced gaps between the time their $600 emergency benefits lapsed and when their $300 in emergency aid kicked in. In many cases, states were slow to set up their unemployment systems to distribute those weekly payments, which were sometimes disbursed later as one large lump sum.
“The help that people got from the federal government came and went in fits and starts throughout the whole quarter,” Tedeschi said. “There were weird lurches forward and back in the aid people got.”
Regardless of how much the economy grew in the third quarter, scores of American households, businesses and entire industries risk falling further behind. Spending may have improved between July and September, but Thursday’s figures don’t fully capture the economy’s lingering pain.
“I don’t think that bifurcation has stopped,” Cook said. “When I see those food bank lines stop snaking for miles, then I will be convinced that the recession is over.”
Jeff Stein and Erica Werner contributed to this report.
