American Gross Domestic Product grew by 33% in the Third Quarter. Why This Will be a Shimmering Mirage Without Further Stimulus.
There it is. On Oct. 29, the Bureau of Economic Analysis released its advanced estimate of real GDP growth for the 3rd quarter, 2020. Real GDP annual growth for the third quarter was 33.1%, a remarkable number. In all the quarters since the end of WWII, such GDP growth never grew more than 16%. I expected a great deal of crowing from the Trump campaign, as if this was his remarkable achievement. I also expected but haven’t seen any other contributors proclaiming a “V-shaped” recovery.
There is a lot to unpack here. We could discuss the fact that the same GDP figure was a 31.4% drop in the 2nd quarter, and mention the old economist’s saying, “what goes down must come up”. We could discuss the new surge in COVID cases nationwide that will cause another massive shutdown, as it has in Europe and much of the world (assuming we want to protect American lives). The next shutdown will have as much a negative impact on the GDP in the coming quarters as the first did on 2nd quarter data. We could point out that some of this growth of GDP was simply people going back to work after restrictions were lifted, which has contributed to the surge in virus cases, and will certainly be reversed.
All that is valid and important. But I want to emphasize another very important reason for the 3rd quarter growth. On March 27 the Cares Act was signed, which pumped $2.2 Trillion into the economy. This was massive, more than 2.5 times the stimulus passed by Obama in 2009. Of course, it also added $2 trillion to our grandkids’ debt, but that is a different subject. The stimulus provided so much support that disposable personal income actually increased in the 2nd quarter, which then resulted in an increase in spending, and the GDP, in the third quarter.
In the chart below, you can see that the relationship between real GDP, disposable income, and personal consumption expenditure have all been closely aligned during the last 4 years, as they tend to be most of the time. But beginning toward the end of the 1st quarter the economy began to shut down, millions of people weren’t working, and both personal expenditures and GDP plummeted, first 5% in the 1st quarter, then another 31% in the 2nd quarter.
At the same time, while the economy was hunkering, a strange thing happened. People’s disposable incomes went up, increasing by almost 47% in the 2nd quarter. How could that be, you may ask. Well, to paraphrase that paragon of pithy wit, James Carville, “It’s the stimulus, stupid!”. It took a few weeks for the CARES funds to begin to flow, but as they did people began to spend again, to the tune of a 41% increase in PCE in the third quarter, after a 33% drop the quarter before. And generally in the US economy, as goes spending, so goes GDP.
But, what goes up, must come down, at least without further action by Congress. Personal disposable income is down 16% in the third quarter; some of the original stimulus is still keeping some afloat, but that is running out and there is nothing expected soon. The 33% GDP growth was achieved due to a massive stimulus, which allowed a surge in spending while the economy “opened up” everywhere. Currently there is no more stimulus, and a surge in the virus may result in many more months of shutdown.
If there is one thing we can learn from this recent lesson it is that the debate about whether fiscal policy or monetary policy are most effective in saving a receding economy can be closed, and Keynes has won. But don’t be dancing in the streets just yet about this latest GDP number. We may find ourselves dancing for our meals.
The source of all numbers and for the chart are from Table 1 of the BEA report released Oct. 29.