Record-Breaking GDP Recovery Somehow Doesn't Matter

When an economy is emerging from a recession, it is supposed to see a massive snapback recovery in gross domestic product (GDP). That is exactly what happened in the third quarter of 2020. The Bureau of Economic Analysis (BEA) reported on Thursday that the third quarter’s real GDP increased by 33.1% on an annualized rate. This is an advance number that will be revised at least twice, but it was above the 30.9% consensus estimate from Econoday.

While the number was massive, the market needs to keep in mind that the second quarter saw a −31.4% GDP print as the pandemic and shutdowns were in full swing. To prove just how large this gain was, note that the prior record-breaking GDP report was a 16.7% annualized gain seen back in 1950.

An argument can be made that GDP is not as accurate a reflection on the true economy as in the past. Nearly 70% of GDP is now tied to consumer spending efforts of some sort, rather than income and production. Regardless of how GDP is considered, it is still the global benchmark for how economic health is calculated.

One issue noted was that the current‑dollar GDP increased by 38.0% in the third quarter. That is a gain of $1.64 trillion to an annualized level of $21.16 trillion. The current-dollar GDP was −32.8%, or −$2.04 trillion, in the second-quarter reading.

Another issue to consider is how prices are playing a role in GDP. The BEA reported that its third-quarter price index rose by 3.4%, after having fallen by 1.4% in the second quarter. Within prices, the personal consumption expenditure (PCE) price index rose by 3.7%, after a prior decrease of 1.6%. Excluding food and energy prices, the PCE price index rose by 3.5% in the third quarter, after having dropped by 0.8% in the second quarter.

The data showed increases in personal consumption, private inventories, nonresidential fixed investment and residential fixed investment. The areas in the economy showing contraction were federal government spending and state and local government spending. The category for imports increased, which also acts as a subtraction against GDP.

According to BEA data, the PCE increase was in both services and in physical goods. Within services, that was led by health care and then by the food services and accommodations category. The increase in expenses for goods was led by the motor vehicles and parts and the clothing and footwear categories.

Thursday’s report also noted that the increase in private inventory investment was driven by an increase in retail trade, with motor vehicle dealers leading the way. An increase in exports was driven by the auto sector and by capital goods. The BEA also noted that the gain in nonresidential fixed investment was driven primarily by transportation equipment.

The BEA was clear that this report was incomplete and subject to further revisions. The report even contains this boxed warning:

The increase in third quarter GDP reflected continued efforts to reopen businesses and resume activities that were postponed or restricted due to COVID-19. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the third quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.

The enhanced unemployment benefits in the second quarter and then no package being passed after the start of August drove the big swings in personal income and savings in the second and third quarters. These numbers will remain rather volatile and not reflective of the real economy until the economy is back to operating on its own without the impact of cash infusions.

The third-quarter GDP report could have been the biggest bit of good news over the entire month of October. With a hotly contested election next week, and with the stimulus talks having died, this report seems to have been swept under the rug.