There is nothing normal about the 2020 recession. Massive nationwide shutdowns of "non-essential" companies caused real GDP to fall 31.4% year-on-year in the second quarter, the largest drop since the 1930s. However, as we expected, a V-shaped recovery is traced.
On October 29, we expect a report in ten days' time saying real GDP rebounded 33.4% year-on-year in the third quarter.
We may make some minor adjustments to this forecast when new reports on business investment, inventories and international trade are released, but the third quarter will still be one of the biggest production leaps the US has ever seen.
It's important to keep in mind that even this massive V-shaped rebound will leave real GDP in the third quarter 2.9% lower than a year ago. Without the shutdowns, the US would have grown 2.5% from a year ago. This means that the economy will be about 5.3% smaller than without COVID-19.
And even with above-average growth in the coming year (say 4.5% a year), the fact that many industries remain very limited, while many companies have been declared bankrupt, means that it will take time to close the 5.3% gap. to seal. Without a full reopening, it will likely take until 2023 for the economy to return to where it would otherwise have been. If we reopen and don't close again, it would happen faster.
That said, the sharp recovery in the third quarter is a testament to the underlying strength of the US economy before the shutdowns, combined with the seemingly limitless resourcefulness of the American people. Twenty years ago, without the technology we have today, there is no way the US would have recovered as quickly as it did in the third quarter. In addition, the US has entered this government-imposed recession with the highest incomes and lowest poverty rates we've ever recorded.
Here's how we calculate the good news of a 33.4% annualized rebound of real GDP for Q3:
Fuel Consumption: Sales of cars and light trucks increased 246% year-on-year in the third quarter (no typo!), While "real" (inflation-adjusted) retail sales outside the auto sector rose 49.8% year-on-year grew. Spending on services also recovered, but not so strongly. Much of the service consumption is related to residential occupancy, which did not decrease in Q2 and thus no recovery required in Q3. Limits also continue to apply to restaurants and bars, movie theaters, and other travel-related services. As a result, we estimate that real consumer spending on goods and services has jointly increased by 38.9% year-on-year, making 26.1 points higher than real GDP growth (38.9 times the consumption share of GDP, i.e. 67%, equals 26.1).
Business Investment: Business investment in equipment rebounded strongly in the third quarter, while intellectual property investment likely recovered at a more moderate pace, and commercial construction continued to decline, the latter reflecting little need for more office space or hotels. When combined, it appears that business investment grew by 22.4% year-on-year, adding 3.1 points to real GDP growth. (22.5 times the 14% share of business investment in GDP equals 3.1).
Residential Building: Residential building rebounded rapidly in the third quarter and has much further to go, with a renewed desire for more space in the suburbs and housing shortages in many parts of the country. We estimate growth at 15% year-on-year, which would add 0.6 points to real GDP growth. (15 times the 4% share of housing construction in GDP equals 0.6).
Government: It is difficult to convert the growth of total government expenditure into a GDP effect because only direct government purchases of goods and services count when calculating GDP. Redistribution (borrowing from our children to spend today) occurs in other categories. Our best guess is that government purchases, particularly for health care and PPE, were growing rapidly, as in the second quarter. We estimate growth at 10.7% year-on-year, which would add 2.1 points to real GDP growth. (10.7 times the 20% share of government buying in GDP equals 2.1). Since GDP is only responsible for spending "today", there is no compensation for the deficit and what we spend from the "future".
Trade: The trade deficit continued to widen in July and August as imports outpaced exports. At the moment, we forecast net exports to subtract an unusually high 3.1 points from third quarter real GDP growth, although trade deficit data in September next week may change this estimate, as well as our estimate for total real GDP.
Inventories: Inventories are likely to have declined further in the third quarter, but not nearly as quickly as in the second quarter, contributing about 4.6 points to real GDP growth. Yes, we know it seems strange that inventories can continue to fall but contribute to GDP, but that's how the math works. If inventories fall less than in the previous quarter, that smaller amount contributes negatively to (or less of) GDP growth.
Add it all up and we get real GDP growth of 33.4% year on year for the third quarter. We aim for more growth in the coming quarters, but nothing comes close to this pace.
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