Economic Impact: Economic Trends Point Toward Sprouts of Growth

Real gross domestic product grew by a historically large 33.1% annualized rate in the third quarter after contracting at an annualized 31.4% in the second quarter.

 

Spending: Increased

Real consumer spending, which makes up about 70% of GDP, advanced a strong 40.7% after contracting an annualized 33.2% in the second quarter.

Although GDP is backward looking in that it reflects news from a quarter that was complete more than a month ago, it shows signs of consumer and business confidence.

Real consumer spending was bolstered by an 82.2% annualized advance in durable goods — items such as automobiles and appliances that last for three years or longer.

The gains in durable goods spending reflect, to a certain degree, consumers’ substitution from services such as vacation, which is limited due to COVID-19, to readily available tangible goods.

But the increase also implies consumers are upbeat about the future.

Typically, consumers do not spend on durable goods unless they expect their jobs to be secure and the economy to grow. Real residential spending advanced a strong 59.3% as consumers purchased homes amidst low interest rates and confidence in continued economic growth.

 

Investment: Mixed 

The 70.1% jump in equipment investment in the third quarter reflects confidence on the part of businesses that only invest when demand for their goods and services is expected to grow.

On the negative side in the third quarter, business investment in structures contracted an annualized 14.6% and real government spending fell an annualized 4.5% with nondefense spending contracting at an 18.1% annual rate.

It is interesting that business investment in equipment increased sharply while investment in structures lagged.

It may reflect some long-term change in the American workplace because of COVID-19.

With remote-work becoming more permanent, there are reports about businesses spending to outfit employees’ home offices and remote workplaces. On the other hand, companies also may foresee less need for office spaces in the future and reduce spending on structures.

 

Total Income: Increased 

No one expects the third quarter growth rate to be sustained in the fourth quarter, but the momentum behind recently released personal income and spending point to a strong 5% annualized real GDP in the fourth quarter.

Personal income increased 0.9% in September after decreasing 2.5% in August.

The makeup of the September increase in income was encouraging. The gain was led by a 0.8% gain in wages and salaries.

In contrast, payments from the federal government decreased 0.1% in September after a 14.8% drop in August as payment for unemployment insurance benefits fell as the federal government’s $600 weekly supplement for unemployed workers ended. 

Together, these two trends—an increase in wages and salaries and a decrease in federal government payments—show that our economy continues to heal during this COVID-induced recession.

Increases in total income resulting from more people being employed is supporting economic growth and is providing the momentum for further growth. More people working are able to spend more, which supports jobs that are badly needed in industries such as restaurants and retail.

As a result of the increases in income, spending by consumers climbed 1.4% after increasing 1.0% in August. When adjusted for inflation, personal spending was up 1.2%.

 

Your Takeaway

Although many economic trends are pointing toward sprouts of growth, the resurgence in cases of coronavirus around the globe remains a risk to short-term growth as we wait for a vaccine.

 

Christine Chmura is CEO and Chief Economist at Chmura Economics & Analytics. She can be reached at (804) 649-3640 or receive e-mail at chris.chmura@chmuraecon.com.