GDP Surges a Record 33% But No V-Shaped Recovery Coming

Mish

Real GDP rebounded 33.1% but Covid losses remain.

Strong Rebound But

Real GDP 2020 Q3

The BEA reports real gross domestic product (GDP) increased at an annual rate of 33.1 percent in the third quarter of 2020 according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 31.4 percent.

Economy Not Recovered

The above chart from the BEA makes it appear as if the economy has fully recovered. It hasn't.

The economy is about a trillion dollars short of the peak as my lead chart shows.

The BEA assumed an effective annualized deflator of 1.38% for Q3. 

That estimate dramatically understates what the inflation rate would be if housing prices were factored in. It also ignores the stock market bubble, another measure of inflation but one impossible to quantify accurately.

The end result is GDP is very overstated.

The Consumer Metrics Institute accurately comments: 

This astounding headline number is a consequence of the BEA's methodology of annualizing quarter-to-quarter changes, similar to last quarter's preliminary headline of a catastrophic 33% contraction. Down 33% and then up 33% does not put you back at the point where you started. After a 33% contraction you need 50% in growth to accomplish that feat. 

Notable Items

  • Consumer spending for goods was reported to be contracting at a -0.27% rate, down -0.39pp from the prior quarter.
  • The contribution to the headline from consumer spending on services was reported to be -4.99%, down -6.11pp from the prior quarter. The combined consumer contribution to the headline number was -5.26%, down -6.50pp from the prior quarter. 
  • The headline contribution for commercial/private fixed investments was reported to be -0.43%, down -0.34pp from the prior quarter. 
  • Inventories subtracted -0.53% from the headline number, up 0.45pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series. 
  • The contribution to the headline from governmental spending was reported to be 0.13%, down -0.31pp from the prior quarter. 
  • The contribution from exports was reported to be -1.02%, down -1.26pp from the prior quarter. 
  • Imports added 2.32% annualized 'growth' to the headline number, up 1.05pp from the prior quarter. Foreign trade contributed a net 1.30pp to the headline number.
  • The annualized growth in the 'real final sales of domestic product' was reported to be -4.26%, down -7.36pp from the prior quarter. This is the BEA's 'bottom line' measurement of the economy (and it excludes the inventory data).
  • Real per-capita annualized disposable income was reported to have increased by $11 quarter to quarter. The annualized household savings rate was 9.6% (up 2.0pp from the prior quarter). In the 47 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.45%.

No V-Shaped Recovery

There was a strong rebound but don't expect a V-Shaped recovery.

Why?

  1. A third wave of Covid is underway in the US. Covid Cases are at a Record High. Covid Records Shattered In The US and Europe. More cities and states are shuttering restaurants and bars again.
  2. Boeing, Raytheon, and the Airlines are all laying off workers starting October. These layoffs have not hit the jobs reports yet.
  3. Congress did not pass another Covid stimulus package. There will be another stimulus package after the election, but it will kick in with a lag. 
  4. State Level Unemployment Benefits Are Rapidly Expiring
  5. The Herd Immunity Theory is in Serious Doubt

Mish

Comments (31)
No. 1-14
anoop
anoop

if we step up the number of covid tests, will that help gdp?

Rocky Raccoon
Rocky Raccoon

How could there not be a strong rebound after government pumped trillions in the economy after shutting it down. If you shut it down, it was obvious GDP was going to slide by double digits. Isn't it expected to do the opposite once everything starts looking more normal while government pumps money into the economy?

The quarter that it seems to me is a more accurate depiction of where we are at would be the fourth quarter wouldn't it? Unless of course there is another lockdown...

LouMannheim
LouMannheim

What rate is used to convert nominal to real? Do the “real” numbers reflect all the printing or is there a lag?

PecuniaNonOlet
PecuniaNonOlet

4 days till election.

Mish
Mish

Editor

Added Blurb:

The BEA assumed an effective annualized deflator of 1.38% for Q3.

That estimate dramatically understates what the inflation rate would be if housing prices were factored in. It also ignores the stock market bubble, another measure of inflation but one impossible to quantify accurately.

The end result is GDP is very overstated.

Jojo
Jojo

This is a good tie-in article.

I Ran the Numbers Again. Stocks Are Not the Economy.
Even when using an equal-weight measure for the S&P 500 and not adjusting for inflation, there is no correlation between the market and GDP.
By Nir Kaissar
October 27, 2020, 6:00 AM EDT

Ever since U.S. stocks began rebounding from their depths of late March, there has been a glaring, and many would say disturbing, disconnect between the devastating impact of Covid-19 on the economy and the celebratory mood of the stock market. Seven months later, that disconnect is as deep as ever. The virus continues to plague the economy and the well-being of millions of Americans while the market marches higher.

Doug78
Doug78

Q3 is much better than Q2 and even though Q3 did not make up for Q2 the trend is still positive. It is not a V recovery but it will do.

Brutus:

"There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures."

The trend is your friend.

numike
numike

The U.S. Supreme Court's conservatives are carving a path that could let President Trump win a contested race

Sechel
Sechel

It was good number but we're still 4% below where we were before the pandemic. Employment is lower and it doesn't seem like there will be much additional momentum. Pandemic is getting worse in all 50 states and Europe is heading towrd more lockdowns. And without a government spending bill i don't see where the impetus comes from. Companies and state governments aren't getting help from the federal government either on testing . Seems clear we'll see layoffs at the local government level too.

Maximus_Minimus
Maximus_Minimus

After a budget deficit of some 3T and other measures, this is the most expensive recovery ever. The GDP should be overlaid against debt or it's just a fake number (actually one of many).

tgs222
tgs222

Error: "After a 33% contraction you need 50% in growth." A 31.4% contraction in this context is essentially .314/4 since it was annualized. Quarterly growth needed to restore that is 8.5% which would be annualized to 34% which is not similar to the innumerately calculated 50%.

Scooot
Scooot

A couple of quotes from an article on Goldmoney.com “The fate of the pound Sterling” on GDP as a measure.

“At this juncture, it is important to understand something to which macroeconomists are generally blind: GDP is the sum total of all transactions, which without the addition of extra money is a static figure.”

“Another way of looking at the relationship is to understand that, apart from some minor variations in money retained for liquidity purposes, all money and profits earned are spent or saved, the latter being deferred consumption, supplying investment capital. With no change in the quantity of circulating currency there can be no change in the total spent and saved, and it is these totals that make up GDP, whether accounted for from the production or consumption sides.”

Therefore, without QE, the monetary value of transactions in the economy measured in pre-expansion dollars would have been a lot less than the reported GDP.


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