U.S. Economy Recovered Significant Ground in Record Third-Quarter GDP Rebound
The economy grew at a record pace in the third quarter—increasing 7.4% over the prior quarter and at a 33.1% annual rate—recovering about two-thirds of the ground it lost earlier in the coronavirus pandemic.
Gross domestic product—the value of all goods and services produced across the economy—jumped following a record decline from earlier in the pandemic when the virus and related shutdowns disrupted business activity across the country. That puts the economy about 3.5% smaller than at the end of last year, adjusted for inflation and seasonal fluctuations.
The third-quarter increase followed a 9% quarter-to-quarter decline in the second quarter, or a 31.4% annualized drop.
Forecasters expect the economy to expand through the fourth quarter, though more slowly, amid a pandemic still disrupting lives and commerce as the virus infects tens of thousands of people a day. Analysts project the economy will end 2020 smaller than a year earlier, but grow in 2021.
The Commerce Department’s GDP report provides the last major quantitative snapshot of the economy before Tuesday’s presidential election. Both President Trump and Democratic presidential nominee Joe Biden have promised to create millions of jobs and further heal the economy.
“This is the quarter that captures the reopening of the economy,” said Tim Quinlan, an economist at Wells Fargo Securities, adding that “it’s a far cry from signaling the all-clear that the economy’s in great shape here.”
U.S. GDP is normally reported at an annual rate, or as if the quarter’s pace of growth continued for a full year. But the pandemic triggered extreme swings in output—a severe drop followed by a quick rebound—making the annualized numbers misleading. No one expects second- or third-quarter numbers to continue for a full year.
The recovery is expected to slow in the fourth quarter as the temporary jolt from the economy’s reopening and government stimulus fades, with unemployment expected to remain high this winter. The Wall Street Journal’s October survey of economists found that more than half of respondents don’t expect GDP will return to its pre-pandemic level until next year and that the economy will contract 3.6% this year, measured from the fourth quarter of 2019.
Initial jobless claims, a proxy for layoffs, fell by 40,000 to 751,000 in the week through Oct. 24, the Labor Department said Thursday. That was the lowest level of claims since mid-March, just before the coronavirus pandemic shut down much business activity throughout the U.S. economy.
The U.S. as of September has recovered about half of the 22 million jobs lost in March and April, at the beginning of the pandemic.
“We’ve had a lot of progress in a short period of time,” Amherst Pierpont Securities economist Stephen Stanley said. He expects the U.S. could in the third quarter get back nearly two-thirds of the output it lost due to the pandemic. Still, “the idea there are going to be winners and losers definitely holds,” he said, pointing to industries—and their workers—that continue to struggle with the effects of the pandemic, such as restaurants and other services-sector businesses.
Recent private-sector data show consumer spending remains below prior-year levels, led by weaker spending on in-person services such as travel, entertainment and restaurants. JPMorgan Chase & Co.’s tracker of credit and debit-card transactions showed that spending was down 5.1% from a year earlier in the week through Oct. 24.
Consumer spending, which accounts for more than two-thirds of U.S. economic output, increased at a 40.7% rate in the third quarter, powering the economy’s growth.
Spending on long-lasting goods was particularly strong. The report showed the pace of consumer spending on durable items rose at a 82.2% rate during the quarter, a sign of increased discretionary purchases on vehicles and recreational goods. Spending on services that were hobbled earlier in the pandemic also rose sharply as people resumed health-care visits, dining out and travel.
Consumers, especially those in higher-income households, bought furniture, autos, computers and home-exercise equipment as many worked and stayed close to home because of the pandemic.
The housing sector also has boomed, thanks to low mortgage rates and demand for larger living spaces. Residential fixed investment—spending on home building and improvements—increased at a 59.3% rate in the third quarter.
Business investment picked up in the third quarter. Nonresidential fixed investment—which reflects business spending on software, research and development, equipment and structures—rose at a 20.3% annual rate. Spending on equipment rose strongly, although spending on structures, a category tied to the struggling oil and gas sector and commercial real estate, fell at a 14.6% annual rate.
Business has been thriving for Premium Service Brands, a home-services franchising company based in Charlottesville, Va., said Chief Executive Paul Flick. Third-quarter revenue is up 44% from a year earlier, following an initial drop in business in March and April when customers were reluctant to have work crews in their homes, he said.
“Overall people are saving money, taking those savings and reinvesting it into their home. They’re not going to restaurants and not traveling,” Mr. Flick said.
Christopher Boone, an automotive-industry data analyst in Westfield, Ind., said that “right now my spending is somewhat wary, just because of uncertainty in markets” related to the pandemic and election.
He and his wife, Nancy, recently bought a car and plan to travel to Florida this winter. He expects the pandemic’s impact on his future spending “will be collateral effects,” such as the availability of products. “Disruptions in supply chains are going to create shortages in the Christmas season, I’m positive of that,” he said. “I think things are just going to be hard to get.”
Meanwhile, restaurants have faced continued weak demand and capacity constraints due to the coronavirus pandemic. Glenn Lunde, chief executive of San Jose, Calif.-based Togo’s Eateries LLC, which operates and franchises a chain of 183 sandwich restaurants, said the past few months have been “quite an adventure.”
Sales were down 26% year-over-year in the second quarter and down 8% in the third quarter. In September, sales fell 6% from the prior year. “I think everyone’s concerned about cases going up, where’s the virus going to go, no one really knows. The election, stimulus, there’s a lot of uncertainty given all these unknowns,” Mr. Lunde said.