But Still Down More Than 3 Percent from Peak

Real GDP increased 33.1 percent at an annualized rate in the third quarter, by far the strongest growth on record. This does not mean the economy grew by one-third in the third quarter; instead, this means that if the economy maintained this pace of growth for an entire year the economy would be 33.1 percent larger at the end of that year. On a simple percentage basis growth was 7.4 percent in the third quarter. Real GDP is the broadest measure of economic activity; it is output of final goods and services, adjusted for inflation.

This record gain in the third quarter followed a record drop in real GDP of 31.4 percent annualized in the second quarter (9.0 percent unannualized), which was on top of a 5.0 percent annualized decline in the first quarter (1.3 percent annualized). All told, output of goods and services shrank by 10.1 percent unannualized between the fourth quarter of 2019 and the second quarter of 2020. Even with the record increase, in the third quarter of 2020 real GDP was still 3.5 percent smaller than it was in the fourth quarter of 2019. To put this in context, a 3.5 percent decline in real GDP would still be the third-worst recession in the post-World War II period. During the Great Recession of 2007 to 2009, real GDP declined a total of 4.0 percent over six quarters.

Consumer spending, supported by stimulus efforts, led the rebound in real GDP in the third quarter. It rose 45 percent at an annualized rate, adding more than 25 percentage points to annualized growth. Growth was especially strong for spending on durable goods, up more than 80 percent annualized. Fixed business investment was also strong, up 20 percent annualized, adding almost 3 percentage points to growth. All of the improvement in business fixed investment came from equipment; investment in structures and in intellectual property both fell in the third quarter. Residential fixed investment jumped 59 percent annualized in the third quarter, adding more than 2 percentage points to growth, as homebuilding rebounded. Investment in inventories added almost 7 points to annualized growth in the third quarter.

Trade was a huge drag in the third quarter. Exports increased 60 percent annualized in the third quarter as global trade flows began to normalize, but imports jumped a whopping 91 percent as consumers purchased more imported goods as spending rebounded. With imports up far more than exports, trade subtracted more than 3 percentage points from annualized third quarter growth.

Government was also a drag in the third quarter, subtracting a little less than 1 percentage point from annualized growth. Federal spending was down around 6 percent annualized, with state and local spending down about 3 percent.

There was a huge rebound in the economy in the third quarter. With businesses reopening, consumers more willing to go out, and a huge jump in household income thanks to stimulus efforts, there was a record increase in real GDP. But the path forward will be much more difficult. The pandemic continues to rage, with US caseloads at record levels, and global cases are also picking up. Consumer spending over the summer benefited from stimulus efforts, with one-time payments and extended and expanded unemployment insurance benefits, but that boost is fading. Household after-tax income, after surging in the spring, has fallen for four straight months through August, although it remains above its pre-pandemic level. And although total consumer spending increased every month from May to August, the pace of gains has slowed dramatically. Businesses will be reluctant to invest given the uncertainties surrounding the paths of the economy and the pandemic going forward. Without federal aid state and local governments could be forced to make huge spending and job cuts, given the need to balance their budgets amid big declines in sales and income tax revenues.

Monetary policy remains the one big positive for near-term growth. The Federal Reserve has pushed both short-term and long-term interest rates to record lows; the huge rebound in the housing market is due in large part to record-low mortgage rates, and rock-bottom interest rates have also supported auto sales. But the central bank can only do so much, and Fed officials have pushed for more fiscal stimulus. A huge package of federal aid, including support for consumers, small and mid-sized businesses, and state and local governments would go a long way in ensuring a strong recovery. But at this point any package would not come until after the election, and perhaps not even until 2021, if at all. Much depends on the results of next week’s election.

PNC’s baseline economic forecast assumes that Congress eventually passes a stimulus package of around $1.5 trillion. Even so, economic growth will be much, much slower in the fourth quarter of 2020 and through 2021, although it will still be well above its long-term trend. PNC’s baseline forecast has real GDP returning to its pre-pandemic level at the end of 2021. Risks are weighted to the downside, including no containment of the pandemic and inadequate fiscal stimulus.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.