US Economy Serves Up Predictably Huge GDP Print. But Does Anyone Care?

The US economy expanded at a record pace in the third quarter, the first read on Q3 GDP showed.

At 33.1%, the headline print was ahead of estimates which called for a ~32% annualized gain. The previous record was 16.7%, notched some 70 years ago.

The dramatic rebound was expected. The report captures a three-month period during which the world’s largest economy attempted to reopen and reorient after the truly catastrophic collapse  that accompanied the pandemic lockdowns. Consumers and businesses were anesthetized by transfer payments and the market was on a morphine drip administered by the Fed.

In short, the worst quarter for the world’s largest economy was followed immediately by the “best” (and the scare quotes are there for a reason).

While this should go without saying, this does not mean the US economy has recovered pre-pandemic levels. Thursday’s headline print would have needed to hit nearly 46% (annualized) to offset the 31.4% annualized contraction logged in the second quarter. And don’t forget, the economy contracted in the first quarter too.

The bottom line: GDP remains 3.5% below its pre-crisis peak.

Nevertheless, the rebound is welcome. Running through the key components finds personal spending logging a 40.7% gain. What you see in the chart (below) is a record.

One of the key questions moving forward is whether the American consumer can hold up in the face of myriad headwinds and in the absence of additional stimulus from Congress. Retail sales remained robust in September, but to say there are more questions than answers would be a late candidate for understatement of the year.

Looking further out into an uncertain future, the question is whether (and to what extent) the pandemic experience has forever altered consumer psychology. To the extent the game has changed (so to speak), that will have ramifications for businesses both large and small.

Turning to business spending, nonresidential fixed investment rebounded to the tune of 20.3%, driven by equipment.

That looks monumental on the face of it, but the list of caveats is so long that enumerating them is well nigh-impossible.

Sales to domestic purchasers (ex.-government) rose 38.1% in Q3.

Again, that’s impressive, but there are just too many caveats to make this meaningful or otherwise “real.”

As you might expect, the residential investment line item shows a laughable leap. And by “laughable” I mean 59.3%. If you’re looking for something to ogle, the figure (below) is a good candidate.

That is the swiftest pace since 1983. Obviously, it’s in part a product of the de-urbanization trend catalyzed by the pandemic. The US housing market was turbocharged in the third quarter by record low mortgage rates.

With the deepest downturn in modern history on the books, and the sharpest rebound ever recorded now enshrined right alongside it, economists will continue to speculate on the shape of the assumed recovery.

This has been something of a parlor game since April. When it’s all said and done, will it look like a “V,” a “U,” an “L,” a “W”? Inquiring minds want (and need) to know!

If you ask Larry Kudlow, a “V” is the most likely outcome. If you ask pretty much anyone not beholden to the Trump administration, the outlook is far more ambiguous.

Jobless claims are still running well above pre-pandemic records and Congress likely undermined public trust by failing to reach a stimulus deal prior the election. Meanwhile, the virus rages unabated, with the 7-day moving average of new infections sitting at roughly 70,000.

The significance of Q3 GDP for markets is debatable. It’s backward-looking by definition, and a huge print was guaranteed.

There do not appear to be any figures in the report that materially alter the narrative or otherwise move the needle for market participants who care far more about what happens next than what happened in July, August, and September.


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