Last quarter saw a record-high jump in economic growth: The government’s initial GDP calculation came in at 33.1 percent for the quarter on an annualized basis.
While this is a remarkable turnaround from the plunge of 31.4 percent the economy registered in the second quarter, economists say the third-quarter blowout is less than it first appears. “The obvious caveat is that when you drop 30 percent and gain 30 percent, you’re still below where you started,” said Jon Burckett-St. Laurent, senior portfolio manager at Exencial Wealth Advisors.
After the announcement, the White House was quick to take credit, with President Donald Trump tweeting that it was the “biggest and best” and promising “Next year will be FANTASTIC!!!” He also alluded to the looming election, saying “So glad this great GDP number came out before November 3rd.”
Vice President Mike Pence echoed Trump’s self-congratulations in a tweet of his own, saying, “President @realDonaldTrump created the Greatest economy in the history of the world and we are well on our way back to that with today’s amazing Third Quarter GDP number!”
In reality, a polarized electorate and worry about Trump’s handling of the pandemic make this bounceback less significant than it might otherwise have been, and market observers say the inability to contain Covid-19 makes this economic growth tenuous.
“It’s easier to get big growth rates when you're coming off a lower base. That’s what a lot of this is,” said Dan North, senior economist at Euler Hermes North America.
The strong GDP figure also camouflages the K-shaped nature of the recovery that has caused economic sectors such as housing to rebound strongly, while other industries like airlines and restaurants remain moribund.
“The utility of a number like GDP is to get it all in one shot,” said Ross Mayfield, an investment strategy analyst at Baird. But a single number doesn’t reflect the breadth of economic circumstances American households and businesses face today, he said. “Particularly in a recovery like this, it’s really hiding the fact that there's a bifurcation.”
For President Donald Trump, this isn’t great news. Market observers say the GDP bounce is too little, too late to move the needle with voters. “The advantage given traditionally to President Trump in respect of economic performance has now totally disappeared,” said Ludovic Subran, chief economist at Allianz SE. “Despite some progress on the job front, the lead of Biden compared with Trump has rather increased.”
Staking his claim to a second term on record-low unemployment and steady — albeit slowing — economic growth might have looked like a winning gambit for Trump at the beginning of the year, but the pandemic upended those plans. In a year when the news cycle whipsawed from one crisis to the next, and with less than a week to go before a historically high-stakes election, Wall Street and voters alike are more focused on what comes next, and on the economic threats that still cast a shadow over the recovery.
Wall Street and voters alike are focused on what comes next, and on the economic threats that still cast a shadow over the recovery.
“We think the markets are more likely to react positively or negatively to elections or virus news and earnings announcements,” said Michael Greenly, senior vice president and senior portfolio manager at UBS Private Wealth Management.
“At this stage, many people have already voted by mail-in ballot or early voting, and high partisanship makes it unlikely that a huge number of people will have a sudden change of heart after a GDP reading that reflects the past, not the future,” Burckett-St. Laurent said.
Investors have more pressing concerns at the moment, Burckett-St. Laurent said. “Markets have tried to ‘look past’ the pandemic, but cases have begun to rise again lately, and we still have no certainty as to the timing of a vaccine,” he said.
“You see the resurgence in Covid-19 cases virtually everywhere,” said Tom Martin, senior portfolio manager at GLOBALT Investments. “These cases are bad. Treatment is better, a vaccine might be closer, but it heightens the huge level of uncertainty that’s out there.”
Even as the virus continues an unchecked sweep across much of the country, Congressional gridlock has pushed the possibility of additional fiscal stimulus — which economists, policymakers and Federal Reserve officials all say is urgently needed — off the table for the near future.
This is bad news for the fourth quarter, North said. The inability of Congress to pass another fiscal stimulus bill chips away at Americans’ spending power at the worst possible time, as landlords and lenders phase out their forbearance programs.
"It is unlikely that a huge number of people will have a sudden change of heart after a GDP reading that reflects the past, not the future."
North said there are a growing number of signs that critical consumer spending is falling, and on pace to shrink further. “If you look at the last four months of real personal income, it’s gotten smaller every month. It’s slowing down. I think a large part of that is we’re getting a decline in personal income,” he said.
Americans have long since exhausted their $1,200 stimulus payments, employment gains have stagnated and the expanded unemployment benefits that were a lifeline for millions have expired. North said that without a speedy resolution, the country will likely face more economic pain.
“We need to have it soon, because holiday sales are coming up, and retailers live and die by holiday sales,” North said.