US Economy Grows at Record Pace, With an Asterisk

Andrew Cummings
October 29, 2020

The United States' Commerce Department on Thursday reported the strongest recovery on record at 33.1% in the third quarter, following the worst economic downturn on record. Despite the third-quarter gains, the economy is still 3.5 percent smaller than it was as the year began. The president will undoubtedly tout the new numbers as evidence that he has successfully led the country through hard economic times.

Consumer spending, which accounts for more than two-thirds of the US economy, is expected to have rebounded at a rate of about 39% in the third quarter, driven by purchases of goods like motor vehicles and electronics.

The massive gain - the biggest since record-keeping started in 1947 - was driven by a surge in spending by consumers and businesses. The industries that benefitted most from increased consumer spending were health care, food services, motor vehicles, and clothing and footwear. It is the first expansion in three quarters. The economy is still climbing out of the deep hole it plunged into in April and May as the pandemic thrust the nation into an economic standstill.

"This is going to be seized upon by both ends of the political spectrum as either evidence of the strength of the post-lockdown economic rebound or a cursory warning that the gains could be short-lived", James McCann, senior global economist at Aberdeen Standard Investments, told CNBC.


"We still don't have the level of GDP surpassing the pre-COVID level until fourth-quarter 2021 and closing the output gap will take even more time", said Kevin Cummins, chief USA economist at NatWest Markets in Stamford, Connecticut.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 40,000 to a seasonally adjusted 751,000 in the week ending October 24. Though claims have dropped from a record 6.867 million in March, they remain above their 665,000 peak during the Great Recession.

Spending was boosted by billions of dollars in government transfers, including a $600 weekly unemployment subsidy and a one-off $1,200 check to households.

Experts also note that the economy faces renewed challenges as COVID-19 cases across the USA continue to spike.


Growth estimates for the fourth quarter are below a 5% rate.

President Donald Trump celebrated the GDP growth, noting that Democratic Presidential Nominee Joe Biden's policies would have the opposite effect if elected. The pandemic has also crushed oil prices, weighing on spending on nonresidential structures like gas and oil well drilling. But government spending was probably a drag as transfers largely happened in the second quarter.

This surprising and historical economic growth, the BEA report released on Thursday states, was spurred by increases in "consumer spending, inventory investment, exports, business investment, and housing investment that were partially offset by a decrease in government spending", on both the federal and state level.


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