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Economic Preview

Oct. 24, 2020, 8:30 a.m. EDT

Record 30% surge in GDP is coming, but it may be too late to help President Trump

GDP report to come out five days before presidential election

By Jeffry Bartash, MarketWatch


AP
President Donald Trump might not get much political benefit from an expected record surge in U.S. economic growth in the third quarter.

Perhaps no one in the country is as eager to the see the latest scorecard for the U.S. economy, known as GDP, than President Donald Trump. It’s likely to show a record surge in the third quarter just days before the 2020 election.

Gross domestic product — the sum of all goods and services produced by the economy — is forecast to leap by a 31.8% at an annualized pace in the third quarter, according to a MarketWatch survey of economists. That would easily be the biggest increase ever in modern times.

Trump has been touting the expected surge in GDP on the campaign trail, but it could come too late to help the president in a reelection battle in which he trails Democratic rival Joe Biden in the polls. The report won’t be published until next Thursday — just five days before the election— even as tens of millions of Americans have already voted.

The election aside, the GDP report will contain plenty of good news. It will show that consumer spending — the engine of the economy — roared back to life during the summer. In a big surprise, the auto and housing markets were also key contributors to growth.

Many buyers rushed to take advantage of record-low interest rates. Others fled from large cities with major coronavirus outbreaks to the relative safety of the suburbs and country, where cars are necessary to get around. Even in cities, many people bought used or new vehicles to get around limits on public transportation or to avoid taking the subway or bus.

A 30% spike in GDP would go a long way in making up for all the ground the economy lost in the spring, when the pandemic forced much of the U.S. to shut down. The economy shrank by a record 31.4% annual rate in the second quarter.

See: MarketWatch Economic Recovery Tracker

Yet the third-quarter surge won’t undo all the damage. The economy would still be about 3% smaller compared to the end of 2019, calculates Gus Faucher, chief economist of PNC Financial Services.

It might not sound like much, but that’s a pretty deep hole. How deep? The hole for the economy would still be almost as deep as it was at the worst stage of the severe 2007-2009 recession, one of the worst in modern times.

Nor will the performance in the third quarter tell us much about where the economy is headed in the final three months of the year. GDP is mostly a look in the rear-view mirror.

Faucher is among many economists who worries the recovery will flag without more fiscal stimulus from Washington. Extra unemployment benefits and subsidies for businesses most harmed by the pandemic expired in July and have not been renewed.

“The unemployment rate is still extremely elevated. We are still seeing major layoff announcements. Small and medium-sized businesses are gong to run into increasing difficulties,” Faucher told MarketWatch.

Read:Stimulus stalemate threatens more hardship and slower recovery, economists warn

And : ‘I’m terrified, frankly’: These people are depending on another stimulus to stay afloat

Michael Gregory, deputy chief economist at BMO Capital Markets, also expects a letdown in growth. Part of the slowdown simply reflects the natural rhythm of a business cycle in which growth tends to be strongest at the start of a recovery.

More telling is the withdrawal of a few trillion dollars in federal support. The third-quarter surge was fueled largely by generous unemployment benefits, emergency business loans and $1,200 checks for most American families. Unlike in prior recessions, incomes actually rose in the spring and early summer.

“There is plenty of uncertainty surrounding the outlook [for the fourth quarter], but one thing is clear,” Gregory said. “GDP growth is going to be meaningfully slower.”

How slow? For clues Wall Street (DOW:DJIA) will pay close attention next week to the consumer confidence data in October and the weekly totals on how many people applied for unemployment benefits.

Read: MarketWatch Economic Calendar

By a variety of measure confidence rose in to a pandemic high in the early fall, but another increase in coronavirus cases across the country could curb the optimism.

Read:Consumer sentiment inches higher as Americans look to improvement next year

Weekly initial jobless benefit claims, meanwhile, fell to a pandemic low in October and dropped below the 800,000 mark for the first time since the pandemic began in March.

Read: Jobless claims sink to pandemic low of 787,000 as California comes back on line

Yet new claims could back up again if the viral pandemic triggers fresh business restrictions or more companies announce layoffs in the absence of another round of federal aid.

In short, the forecast for the economy is cloudy — and the upcoming presidential election is further reducing the visibility.

The future path of the economy could be very different depending on who wins given the sharply contrasting plans of Democratic and Republican candidates in the Nov. 3 election.

Link to MarketWatch's Slice.