December 11, 2020

GDP and the Coronavirus


KEY TAKEAWAYS

  • In the third quarter, the U.S. economy grew at an annual rate of 33.1%. This followed a sharp decrease in the prior quarter, amid widespread restrictions to control the spread of the coronavirus.
  • The surge in GDP was due to rising consumer spending and to private investment, which includes business investment in assets, the change in business inventories, and residential investment.
  • The economy has regained ground, and federal regulators are reviewing two vaccine candidates, but the recent surge in infections around the country adds uncertainty to the economic outlook.

The U.S. economy grew at an inflation-adjusted, annual rate of 33.1% in the third quarter of this year – July through September − compared to the prior quarter. This record pace of GDP growth reflects the economy’s partial reopening during the summer, allowing people to engage in more economic activities. Economic output had dropped at a 5% rate in the first quarter before plummeting by 31.4% in the second quarter amid COVID-19 related restrictions on businesses and gatherings. So far, the economy has regained about two-thirds of this year’s losses. The Congressional Research Service reported that the second-quarter drop was the largest on record and “more than three times larger than the second-largest quarterly decline” in 1958. Previously, the largest quarterly gain was a 16.7% annualized increase in 1950.      

Change in Real GDP from the Previous Quarter

GDP

drivers of recent changes in gDP

Due to the pandemic, the second quarter saw a massive decline in personal consumption, which recently has accounted for about two-thirds of GDP. This component fell at an annual rate of 33.2%, largely because people spent less on services such as doctor visits, eating out, and airplane travel. Gross private domestic investment also dropped substantially. This component of GDP includes business investment in equipment, structures, intellectual property products such as software, residential investment, and the change in business inventories. Spending by state and local governments fell, but this was more than offset by higher federal spending as coronavirus relief programs were implemented. Some states saw steeper declines than others: in Hawaii and Nevada, GDP fell at a 42.2% annual rate as tourism and travel plummeted, while in Delaware the decline was 21.9%.

GDP rebounded rapidly in the third quarter, as some states and cities eased their restrictions on businesses. During this period, personal consumption expanded at a fast rate, partly because people spent more on services such as health care, food services, and accommodations. Consumers also increased spending on goods such as clothing, vehicles, and household items. Consumption of services contributed nearly half − 15.7 percentage points − of the total 33.1% GDP growth for the third quarter, and consumption of goods accounted for another 9.5 percentage points of the increase. Private investment also rebounded in the third quarter and contributed about 11.8 percentage points to the quarter’s growth. These components of GDP were partially offset by decreases in net exports and government spending.

Contributions to the 33.1% Increase in Third Quarter GDP

GDP

economic outlook

Federal Reserve chair Jerome Powell recently told senators, “A full economic recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.” Widespread vaccination will be critical to helping Americans return to everyday activities. By the end of next week, a Food and Drug Administration advisory committee will have met to discuss emergency use authorization for two vaccine candidates. Two other vaccines are in late-stage clinical trials. In Congress, Republicans are working to provide additional coronavirus relief, including for vaccines, testing, contact tracing, schools, child care, unemployed Americans, and small businesses.

The economy has regained more than half of the jobs lost this spring and has continued to add jobs in the fourth quarter, though the pace has slowed. The Fed’s most recent Beige Book reported that businesses and economists describe recent growth as “modest or moderate.” It relayed concerns about the surge in infections around the country and new state and local government restrictions on businesses and gatherings. In January 2021, the Commerce Department will release its first estimate for fourth quarter GDP. Last month, the Fed’s Open Market Committee said that while the economy has rebounded more quickly than earlier expectations, growth in the four quarter would likely slow down. The consensus forecast from one survey of economists was for 3.5% growth in the last quarter of this year, though growth for the year overall would be negative. The economists expect continued growth into 2021 and positive growth for next year as a whole.

Issue Tags: Economy, COVID-19