U.S Economy Posts Third Quarter Gains

U.S. real gross domestic product (GDP) increased 33.1 percent in the third quarter according to the Bureau of Economic Analysis (Figure 1). The growth follows a decrease in the second quarter of 31.4 percent. Quarterly swings of this magnitude are unparalleled and provide confirmation of the stormy economic waters businesses are attempting to navigate with COVID-19. The contraction in GDP in the first two quarters had tipped the economy into a recession, but the third quarter upswing means the economy is no longer in a recession. In terms of actual dollars, GDP increased $1.64 trillion in the third quarter after losing $2.04 trillion in the second. While the third quarter rebound was extraordinary, it didn’t offset the COVID-19 induced decline in the second quarter. For the year, GDP remains 3.5 percent below its level entering 2020.

The third quarter growth was fueled by increases in personal consumption expenditures, up 41 percent, inventory investment, and exports. Spending on health care, food services, motor vehicles, clothing, and footwear paced the increases in personal consumption. Exports of motor vehicles, engines, and parts spurred the increase in exports. Drags on the economy included decreases in government spending and increases in imports.

What might happen to economic growth in the fourth quarter? The big unknown is COVID-19. Will the ongoing resurgence of cases continue? If so, will it result in another shutdown of the economy? England last week announced a second national lockdown due to the growth in COVID-19 cases. Reduced government transfers in the third quarter resulted in lower personal income. Will this mean lower consumer spending in the fourth quarter? On the other hand, unemployment claims have fallen off which could encourage spending. Will Congress pass a stimulus package? How will the election results affect the economy? Uncertainty abounds.

The good news is the roaring growth in the third quarter has erased the direst predictions economists had for GDP growth this year. Still, most economist expect GDP will finish this year below last year. October projections by the International Monetary Fund (IMF) project the U.S. economy will shrink 4.3 percent this year and show a growth of 3.1 percent next year, below the estimated average growth for advanced economies of 3.9 percent. The IMF does not expect the U.S. economy to return to 2019 levels until 2022.

Figure 1. Percentage Change in Real GDP from Preceding Quarter

Source: Bureau of Economic Anaylsis