A Record Rebound, but Economy Still in a Deep Hole
The U.S. economy grew at an unprecedented 7.4% pace from the second to the third quarter, the Commerce Department announced Thursday. On an annualized basis, the growth rate was 33.1% — the highest annualized growth rate on record.
The historic growth came on the heels of an equally historic decline the previous quarter, when the economy shrank by 9.1%, or 31.4% on an annualized basis, as businesses closed their doors and people stayed home amid the Covid-19 pandemic.
Although the latest numbers are undoubtedly positive, they come with lots of caveats, as economists took great pains to explain Thursday. Some important points to consider:
The U.S. economy is still in a deep hole: Gross domestic product is still about 3.5% below the level recorded in the fourth quarter of 2019, the last reporting period before the coronavirus pandemic hit, Daniel Vernazza, chief economist at UniCredit Bank, said in a note Thursday.
“That means we are still down almost as much as we were during the height of the Great Recession in 2008-09,” Diane Swonk, chief economist at Grant Thornton, tweeted.
CNBC analyst Ron Insana noted that the economy is now about as big as it was in the first quarter of 2018. “Q3 GDP would have to have been +53% to bring the economy to pre-pandemic levels,” he said. (See the chart from J.P. Morgan below.)
The economy is slowing: The GDP report gives us a look at what was happening from July to September, but conditions have changed since then. While the summer months were powered by business reopenings and a massive flow of federal aid to the unemployed and small business owners, much of that positive momentum has slowed or even reversed. Restrictions on commerce are returning as the coronavirus surges again, and the failure of political leaders to agree on a new round of relief spending means that millions of unemployed workers face sharp reductions in income and spending.
A K-shaped recovery: There are about 11 million fewer people on payrolls than before the pandemic hit, and much of the economic suffering is concentrated among low-income, less-well-educated workers in the service sector. That segment will be especially hard hit by the lack of federal support and a resurgence of the coronavirus and could take years to recover anything like its pre-pandemic levels of employment and income.
Layoffs persist: In a separate report Thursday, the Labor Department announced that 751,000 people applied for state unemployment benefits last week, down 40,000 from the week before. Another 360,000 people made claims Pandemic Unemployment Assistance, the federal program that covers gig workers and the self-employed, bringing the total of new filers to about 1.1 million. While the trend in layoffs, for which new jobless claims serve as a proxy, is positive, falling steadily from record highs in the early days of the pandemic, job losses remain at extraordinarily high levels — higher than we saw at the peak of previous recessions.
Lower expectations for the fourth quarter: Economists don’t expect to see a repeat of the third quarter. Michael Feroli of J..P Morgan said in a note to clients that “a large double-digit increase in 3Q GDP was effectively ‘baked in the cake’ by the time we got to the middle of the summer” thanks to the powerful rebound in consumption throughout the economy. Looking ahead, the data should look more normal, with consumption pushed higher by an elevated savings rate and pulled lower by a resurgent coronavirus. “On net, we are holding on to our 3.0% forecast for 4Q GDP,” Feroli said.
A political football: The numbers are dramatic, and politicians were quick to frame the report in ways that seemed most advantageous. A sample:
President Donald Trump: “GDP number just announced. Biggest and Best in the History of our Country, and not even close. Next year will be FANTASTIC!!! However, Sleepy Joe Biden and his proposed record setting tax increase, would kill it all. So glad this great GDP number came out before November 3rd.”
Democratic nominee Joe Biden: “GDP rose last quarter, but visits to food banks haven’t slowed, and poverty has grown. We’re on track for the worst economic downturn in over 70 years, and Donald Trump is on track to be the first president since Herbert Hoover to leave office with less jobs than when he came in.”
White House economic adviser Larry Kudlow: “Since the data going back to 1947, we've never had anything remotely close to this ... this thing was kicking on all cylinders. ... It's a strong, strong recovery. The V-shaped concept that I coined a while back [is] looking pretty good right now.”
- House Majority Leader Steny Hoyer: "There can be no mistaking the truth: our economy is in a crisis the likes of which we have not seen in our lifetimes. President Trump may claim that a 2.9% decrease in real GDP over the past year is somehow a vindication of his leadership through this crisis, but tens of millions of American workers and small businesses are living the economic consequences of his failure. ... Americans must not be fooled by the misleading rhetoric President Trump has embraced.”
Pelosi and Mnuchin Battle Over Stimulus Failure
With five days to go before Election Day and no chance of a coronavirus relief package getting done before then, President Trump, House Speaker Nancy Pelosi (D-CA) and Treasury Secretary Steven Mnuchin played another round of the stimulus stalemate blame game on Thursday — while still dangling hope that the legislation could get done after the election.
Trump again blamed Pelosi for the lack of a deal and promised “a very big package” right after the election. “Once we get past the election, we’re going to get it. It may be bipartisan, it may not have to be. Depending on -- if we win the House, it won’t have to be. Right after the election, we’ll get it one way or the other,” Trump reportedly said on “The Jon Taffer Podcast.”
But in a letter to Mnuchin, Pelosi indicated just how far apart the two sides remain after months of back and forth. She said that Democrats “are still awaiting the Trump Administration’s promised responses on multiple items of critical importance.”
Pelosi’s letter listed a litany of areas where the two sides still had unresolved differences, including a national strategy for coronavirus testing, tracing and treatment; aid to state and local governments; enhanced unemployment insurance benefits; child care funding; tax credits; money for schools to reopen safely; and liability protections for businesses.
“In other words,” Politico’s Anna Palmer and Jake Sherman noted, “Pelosi is suggesting Mnuchin and the administration owe her answers on nearly every contentious issue in the Covid relief package. So -- no, the two sides are nowhere close. Not at all.”
Even so, Pelosi urged Mnuchin to respond. “Your responses are critical for our negotiations to continue,” she wrote. “The President’s words that ‘after the election, we will get the best stimulus package you have ever seen’ only have meaning if he can get Mitch McConnell to take his hand off the pause button and get Senate Republican Chairmen moving toward agreement with their House counterparts.”
Mnuchin released a letter of his own in the afternoon, accusing Pelosi of playing politics instead of genuinely pursuing a deal. “I woke up this morning and read your letter to me in the press. Because you sent it to my office at midnight and simultaneously released it to the press, I can unfortunately inly conclude that it is a political stunt.”
Mnuchin said that, contrary to Pelosi’s claims, the administration had accepted her proposals on testing, with “minor comments,” and had responded on contact tracing as well. He accused Pelosi of refusing to compromise in other areas and hindering relief efforts by refusing to accept piecemeal legislation. “Your ALL OR NONE approach is hurting hard-working Americans who need help NOW,” he wrote.
A Pelosi spokesperson told The Washington Post that the White House had still not lived up to Mnuchin’s promise to accept language on crushing the virus and said it is “disappointing” that the administration issued Mnuchin’s letter instead of “meaningful responses to meet the needs of the American people.”
Chances of a “lame duck” deal? The speaker told reporters at her weekly press conference that she would like to reach a deal in the “lame duck” congressional session after the election, in part to allow a President Joe Biden to pursue his agenda. “I want a bill for two reasons. First and foremost the American people need help. They need real help. And second of all, we have plenty of work to do in a Joe Biden administration ... So we want to have as clean a slate as possible going into January,” Pelosi said.
But she indicated that she would not soften her demands for a comprehensive package during a lame duck session, even with the prospect of additional legislation after Biden takes office.
What it all means: Pelosi’s letter shows the negotiators didn’t make as much progress as some of their earlier comments suggested, meaning that a deal during the lame duck is far from a sure bet. “Where the talks go after the election is wholly uncertain — a comeback win would award Trump with greater leverage but a loss could also make him less invested in an agreement and less willing to compromise to get there,” Andrew Taylor of the Associated Press says.
Thursday’s GDP report may also make it harder to reach a bipartisan deal, as Republicans touted the numbers as evidence that their plans to reopen the economy have worked while Democrats said the data showed that the CARES Act passed in March helped and that more federal assistance is needed.
Quote of the Day
“I’ve never seen anything like it. I don’t think they had any processes in place. They just sent the money out.”
– A Small Business Administration customer-service representative, quoted in a Bloomberg article on the “avalanche of fraud” in the SBA’s Economic Injury Disaster Loan program. “For a few months this year, a U.S. government aid program meant for struggling small-business owners was handing out $10,000 to just about anyone who asked,” the article says. “All it took was a five-minute online application. You just had to say you owned a business with at least 10 employees, and the grant usually arrived within a few days. People caught on fast.”
- It’s Great the Economy Grew. But It’s Still in a Hole, and Congress and Trump Have Gone AWOL – Washington Post Editorial Board
- The Record Economic Boom Is a Mirage – Nir Kaissar and Timothy L. O'Brien, Bloomberg
- Despite GDP Growth, Polls Suggest Trump’s Advantage on Economic Stewardship Is Narrowing – James Hohmann, Washington Post
- Biden’s Proposed Tax Hikes Would Do Little to Slow The Economy – Benjamin R. Page, Tax Policy Center
- Biden’s Health Care Plan Is Somehow Still a Mystery – Libby Watson, New Republic
- Lockdown 2.0 Reveals Covid-19 Failures We Must Fix – Mohamed A. El-Erian, Bloomberg
- Trump's Threat to 'Anarchist Cities' Violates the Constitution – Meryl Justin Chertoff, The Hill
- Trump Didn’t Build His Border Wall With Steel. He Built It Out of Paper – Catherine Rampell, Washington Post
- Trump’s War on Civil Servants Is Worse Than It Looks – Cass R. Sunstein, Bloomberg
- Trump’s Most Worrying Attacks on Democracy, in One Giant Chart – Christopher Ingraham, Washington Post
- How America Helped Defeat the Coronavirus* – Sanya Dosani et al, New York Times (video)