United States economy bounces back in Q3

Daniel Fowler
October 29, 2020

Coming off the worst quarter in history, the USA economy grew at its fastest pace ever in the third quarter as a nation battered by an unprecedented pandemic put itself back together. About 22.7 million Americans were receiving unemployment benefits in early October, though many have exhausted their eligibility for state aid.

"We still don't have the level of GDP surpassing the pre-COVID level until fourth-quarter 2021 and closing the output gap will take even more time", said Kevin Cummins, chief USA economist at NatWest Markets in Stamford, Connecticut.

On Wednesday, Joe Biden's deputy campaign manager, Kate Bedingfield, noted in a memo that "Trump's "mission accomplished" rhetoric does not capture the true direction or state of the USA economy". "There is a long way to go until the economy has fully healed and there could be more economic pain ahead", says James Knightley, chief global economist at ING.

Facing a tough battle to hold on to the White House in the November 3 election, Trump seized on the data from the Commerce Department as proof the recovery he promised from the Covid-19 pandemic is underway.

"[But] the reality is that the GDP numbers demonstrate that the us economy did indeed rebound strongly as lockdown measures were lifted", he added. European countries are entering new forms of lockdowns as COVID-19 cases rage and figures are rising also in the US.

"We are in a deep hole and President Trump's failure to act has meant that Q3 growth wasn't almost enough to get us out of; the recovery is slowing if not stalling; and the recovery that is happening is helping those at the top, but leaving tens of millions of working families and small businesses behind", he said in a statement.

"The pace of recovery is expected to slow going forward", says Nathan Janzen, a senior economist at RBC Capital Markets.

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"The momentum heading into the fourth quarter is quite weak", said Ben Herzon, executive director of US economics at IHS Markit, a forecasting firm. That, together with persistent layoffs and slowing employment growth could restrain consumer spending in the coming months.

Spending on long-lasting goods was particularly strong.

Though the unemployment rate, at 7.9%, is down significantly from 14.7% at the start of the pandemic recession, it is still historically high. No one expects second- or third-quarter numbers to continue for a full year. But spending on services remained below its fourth quarter level. "Expressed as an annual rate, consumer spending on durable goods was up more than 80%, business spending on equipment increased more than 70%, residential investment increased nearly 60%, and both exports and imports of goods were up over 100%".

The economy had contracted at an annual revised rate of 31.4% in the previous quarter, the sharpest decline in modern American history, and the economy remains 3.5% smaller than at the end of 2019.

Economists polled by Reuters had forecast GDP expanding at a 31% rate in the July-September quarter. In the prior three years, GDP expanded on average by 2.6% a year, a solid pace close to the economy's potential.

Economists anticipated a core PCE increase of 4.0%. But he warned that the job market might not fully recover until perhaps 2023.

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Workers in those sectors, as well and youth and low-wage workers, continue to face high levels of unemployment, the report says. Measures of core inflation are all below 2 percent, consistent with an economy where demand has fallen by more than supply.

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