Strong Rebound But

Real GDP 2020 Q3

The BEA reports real gross domestic product (GDP) increased at an annual rate of 33.1 percent in the third quarter of 2020 according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 31.4 percent.

Economy Not Recovered

The above chart from the BEA makes it appear as if the economy has fully recovered. It hasn't.

The economy is about a trillion dollars short of the peak as my lead chart shows.

The BEA assumed an effective annualized deflator of 1.38% for Q3. 

That estimate dramatically understates what the inflation rate would be if housing prices were factored in. It also ignores the stock market bubble, another measure of inflation but one impossible to quantify accurately.

The end result is GDP is very overstated.

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The Consumer Metrics Institute accurately comments: 

This astounding headline number is a consequence of the BEA's methodology of annualizing quarter-to-quarter changes, similar to last quarter's preliminary headline of a catastrophic 33% contraction. Down 33% and then up 33% does not put you back at the point where you started. After a 33% contraction you need 50% in growth to accomplish that feat. 

Notable Items

  • Consumer spending for goods was reported to be contracting at a -0.27% rate, down -0.39pp from the prior quarter.
  • The contribution to the headline from consumer spending on services was reported to be -4.99%, down -6.11pp from the prior quarter. The combined consumer contribution to the headline number was -5.26%, down -6.50pp from the prior quarter. 
  • The headline contribution for commercial/private fixed investments was reported to be -0.43%, down -0.34pp from the prior quarter. 
  • Inventories subtracted -0.53% from the headline number, up 0.45pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series. 
  • The contribution to the headline from governmental spending was reported to be 0.13%, down -0.31pp from the prior quarter. 
  • The contribution from exports was reported to be -1.02%, down -1.26pp from the prior quarter. 
  • Imports added 2.32% annualized 'growth' to the headline number, up 1.05pp from the prior quarter. Foreign trade contributed a net 1.30pp to the headline number.
  • The annualized growth in the 'real final sales of domestic product' was reported to be -4.26%, down -7.36pp from the prior quarter. This is the BEA's 'bottom line' measurement of the economy (and it excludes the inventory data).
  • Real per-capita annualized disposable income was reported to have increased by $11 quarter to quarter. The annualized household savings rate was 9.6% (up 2.0pp from the prior quarter). In the 47 quarters since 2Q-2008 the cumulative annualized growth rate for real per-capita disposable income has been 1.45%.

No V-Shaped Recovery

There was a strong rebound but don't expect a V-Shaped recovery.

Why?

  1. A third wave of Covid is underway in the US. Covid Cases are at a Record High. Covid Records Shattered In The US and Europe. More cities and states are shuttering restaurants and bars again.
  2. Boeing, Raytheon, and the Airlines are all laying off workers starting October. These layoffs have not hit the jobs reports yet.
  3. Congress did not pass another Covid stimulus package. There will be another stimulus package after the election, but it will kick in with a lag. 
  4. State Level Unemployment Benefits Are Rapidly Expiring
  5. The Herd Immunity Theory is in Serious Doubt

Mish