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A surge in growth for the third quarter, but slower growth ahead continues

SEP. 28, 2020
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Monthly Review (Page 3)

August brought more signs of strong recovery for the economy with another surge in hiring, a sharp drop in the unemployment rate, and further spending by consumers – especially for houses. Business sector readings were also positive with both manufacturing and services showing solid expansion in August and small business owners feeling more optimistic. As noted, the housing market continues to soar with sales in August at the highest level since 2006 and leading indicators pointing to more strength ahead with record low mortgage rates and a desire for “space” driving a surge in demand. Still, there remain negative effects from the steep economic downturn as millions of workers are unemployed while elevated jobless claims suggest continued stress on business operations with overall spending below pre-COVID levels. The Fed emphasized at its September meeting that it will provide ample support for the recovery, suggesting no rise in its policy rate is expected for several years. Equity markets fell from record highs during September, but most indices remain up for the year.

Outlook (Page 4)

A burst in economic activity is projected for the third quarter with estimates of 25 to 30 percent annualized growth in real GDP, by far the strongest quarter since World War II. After slower, but still positive growth for the fourth quarter, we expect an above-trend pace of expansion for at least a couple of years as businesses and consumers recover from the COVID-19 recession — but there are many risks, led by a range of vaccine outcomes. Our baseline outlook assumes successful vaccines by the end of this year, with widespread availability by the middle of 2021. We expect strong growth for next year without regard to who sits in the White House — with tax cuts possible (albeit with rising tariffs) if President Trump is re-elected and spending increases (albeit with rising taxes) if Vice President Biden is elected. Significant policy differences between the two candidates would likely cause a wider divergence of economic outcomes starting in 2022. The level of economic activity should surpass its pre-COVID peak in 2022, but it is unlikely to improve enough to recover all the deadweight loss created by this year’s downturn.

Go deeper with the full September dashboard linked below.

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