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*U.S. real GDP jumped by 33.1% q/q annualized (BCM: 34%, consensus: 32.0%) in Q3 (+7.4% q/q non-annualized), following its historic decline of 31.4% q/q annualized in Q2 (-9.0% non-annualized) and decline of 5.0% q/q annualized in Q1 (-1.3% non-annualized), placing it 3.5% below the Q4 2019 level (Chart 1). Nominal GDP, the broadest measure of current dollar spending in the economy, increased by 38% q/q annualized (+8.4% non-annualized) in Q3 after its 32.8% q/q annualized decline (-9.5% non-annualized) in Q2, as the price deflator increased by 3.6% q/q annualized.
*Real residential fixed investment led the way, as expected, surging by 59.3% q/q annualized to 0.7% above its pre-pandemic level. Other private sector components also jumped but remained below their pre-pandemic levels: real consumption (+40.7% q/q annualized) and business fixed investment (+20.3% q/q annualized). Government purchases declined by 4.5% q/q annualized (Charts 2 -5). A significant widening of the trade deficit subtracted 3.1pp from growth and inventory investment added a massive 6.6pp to growth after subtracting 3.5pp in Q2 (Chart 6).
*Monthly data suggest that growth in the economy has already slowed from the outsized gains between May and July, so we expect real GDP growth to moderate to 4.0% q/q annualized in Q4 (+1.0% q/q non-annualized). Until there are trusted and widely available treatments for COVID-19, services activities will likely grow only modestly. Goods consumption has already exceeded its pre-pandemic level, so it is unlikely to boost growth as much as it did in the early stages of the recovery. Production and global trade will continue to rise solidly, as businesses replenish inventories (Chart of the week - Global trade and IP are rebounding solidly, October 23, 2020).
*We currently forecast real GDP to attain its pre-pandemic level by Q4 2021. At that time, even though we expect labor markets to continue to improve throughout 2021, we forecast that the unemployment rate will still be above its pre-pandemic level. Our assessments of real GDP and unemployment may be influenced by changes in economic policies.
Real consumption, which accounts for nearly 70% of U.S. GDP, is now 3.3% below its Q4 2019 level, reflecting the still-depressed level of services consumption. The 82.2% and 28.8% q/q annualized increases in durable and nondurable goods consumption, respectively, lifted them 11.9% and 4.0% above their Q4 2019 levels. Both have benefited from the shift to stay-at-home and the generous government income support payments to individuals. Services consumption jumped by 38.4% q/q annualized in Q3, but, following its declines of 9.8% and 41.8% q/q annualized in Q1 and Q2, respectively, it is still 7.7% below its Q4 2019 level and continues to be constrained by health concerns and restrictions (Charts 7-9). We expect the holiday shopping season to support goods consumption in Q4 as reduced holiday leisure activities and travel weigh on services consumption.
Residential fixed investment, which includes new housing construction, brokers’ commissions from home sales, plus home improvements, is the only major private component of GDP that has returned above its pre-pandemic level. All components of residential investment registered strong gains in Q3: single-family and multifamily construction (+19.0% q/q annualized), brokers’ commissions (+343.2% q/q annualized), and home improvements (+22.5% q/q annualized). See Chart 10. The drop in mortgage rates to historic lows has boosted home sales, and the shift to work-from-home has led to a surge in home improvement projects. We do not expect housing activity to continue to rise at such rapid rates going forward, but favorable demographics will sustain its growth in the intermediate run.
Business fixed investment was boosted by a 70.1% q/q annualized increase in equipment investment. Intellectual property products (IPP) investment declined by 1.0% q/q annualized in Q3. The 11.4% q/q annualized decline in IPP investment in Q2 was smaller in magnitude than other categories, so a massive rebound was not to be expected, but its Q3 decline is surprising. Structures investment tumbled by 14.6% q/q annualized in Q3, its fourth consecutive quarterly decline (Chart 11). Business investment in most types of structures declined with investment in mining exploration, shafts, and wells falling the most, by 67.3% q/q annualized in Q3 following its 82.1% q/q annualized decline in Q2, reflecting low oil prices and issues that predate the pandemic.
Federal government purchases declined by 6.2% q/q annualized in Q3 after the 16.5% q/q annualized boost in Q2 from administrative costs related to the Paycheck Protection Program (PPP). Note that government purchases does not include the government’s income support transfers to individuals or its loans/grants to businesses. State and local government purchases declined for the second consecutive quarter (Q3: - 3.3% q/q annualized, Q2: -5.4% q/q annualized), reflecting severely squeezed finances (Chart 12).
Net trade subtracted 3.1pp from Q3 real GDP growth, as the surge in imports (+$475b) doubled the increase in exports (+$239b). See Chart 13. With goods consumption quickly rebounding above pre-pandemic levels, businesses boosted imports to replenish depleted inventories for the holiday shopping season.
The 38% q/q annualized increase in nominal GDP in Q3 reflects a solid rebound in aggregate demand from the reopening of the economy, but it is still 2.7% below its pre-pandemic level. Absent a sustained acceleration in nominal GDP, inflation is likely to remain contained over the next year given the persistent risks from COVID-19. Indeed, although the headline and core PCE price indexes increased by 3.7% and 3.5% q/q annualized in Q3, respectively, they were up only 1.2% and 1.4% yr/yr, respectively (Chart 14).
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Roiana Reid, roiana.reid@berenberg-us.com
Member FINRA & SIPC
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