It was widely known that the economy roared in Q3, extending an extraordinary rebound after hitting bottom in the second quarter. The only question was how strong third-quarter growth was, with an unusually wide range of estimates being raised over time as other data painted an increasingly positive picture.
We still don’t have the definitive answer, but the first official estimate certainly didn’t disappoint. The economy grew at an estimated 33.1% annualized pace last quarter, easily the strongest quarterly result in the United States since recordkeeping began. It was a virtual mirror image of the staggering 31.4% drop in GDP in the second quarter.
That’s not to suggest that the economy is out of the woods — it’s not. It does show how quickly that spending and consumption can and did return toward (although not to) normal. Despite that record surge, aggregate output remains well below its pre-pandemic peak, leaving a gap that remains to be filled.
Consumer spending bounced back, rising 40.7% in a partial reversal of the spending collapse earlier this year. A temporary decline in COVID-19 cases, a partial reopening of the economy, and enhanced unemployment benefits that provided support to over 22 million unemployed workers all contributed to consumers’ ability and willingness to resume spending.
Residential investment also soared by nearly 60% in the third quarter, encouraged by the sharp decline in mortgage interest rates and pent-up demand fueled a rush of activity for homebuilders and buyers. Couple that with an over 80% increase in consumer purchases of durable goods, including cars and appliances and you have a very favorable picture of recovering consumer confidence.
Business investment rebounded by over 20%, although an outsized increase in inventories accounted for a large portion of that increase. That rebuild ended five consecutive quarters of inventory drawdowns. Public-sector spending was the outlier, as belt-tightening across federal, state, and local government weighed modestly on headline GDP.
Generally speaking, it was a combination of aggressive monetary stimulus and fiscal support that provided a bridge for an economy trying to make it to the other side of a chasm created by an exogenous shock that shut down large portions of the economy virtually overnight earlier this year. Although the recovery is on track, both fiscal and monetary policy support will be needed for some time to continue to support an economy that remains vulnerable to the health threat posed by COVID-19. The good news is that additional fiscal stimulus is all but a foregone conclusion; it’s not a matter of if, but when, how much, and how it will be delivered.
The bottom line? The official report on Q3 GDP didn’t disappoint, affirming that the economy recovered strongly in the past quarter. Momentum has slowed, as is to be expected after the initial burst off the bottom in any recovery. The wild card is the resurgent health risk posed by COVID-19 and the negative economic impact of any policies that may be employed to reduce its spread. For now though, the recovery is very much on track.
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