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GDP Bounces Back

The outbreak of COVID-19 and the subsequent lockdowns triggered the largest quarter over-quarter decline in gross domestic product (GDP) since WWII, so perhaps it comes as no surprise that the following quarter tallied the sharpest rebound in that same time period. GDP expanded 33.1% on an annualized basis in the third quarter, ahead of Bloomberg consensus expectations of 32%, fueled by the continued reopening of businesses and reversing much of the economic fallout stemming from COVID-19-related lockdowns.

As shown in the LPL Chart of the Day, consumer spending—the largest contributor to GDP in the US and roughly 70% of economic output—rebounded in a powerful fashion in the third quarter.

Robust Q3 Gross Domestic Product Rebound Led By Consumer Spending Contribution to GDP Growth

However, spending numbers were uneven, with a considerably larger portion spent on goods rather than services—consistent with the continued behavioral and business restriction effects on these industries. Further, the timing of spending was also fairly uneven, as much of the growth in consumer spending came in the early weeks of the third quarter and tapered off in recent weeks where the effects of fiscal stimulus and rising new COVID-19 cases influenced consumer behavior.

“GDP rebounded stronger than expected in the third quarter, but the big question on everyone’s mind is whether the economy can remain on firm ground in the fourth quarter and into 2021,” stated LPL Chief Market Strategist Ryan Detrick. “Barring a new round of fiscal stimulus, it’s likely that growth will taper off in the fourth quarter, but we still don’t expect a double-dip recession.”

Regardless of the state of economic momentum, it is remarkable that GDP is already only about 3.5% away from recovering the entire pandemic losses. The resilience of US consumers has been the top story of the recovery, even with the historic fiscal stimulus.

The surge in growth in the third quarter may also have political implications. As we noted in our recent Weekly Market Commentary: Are the Polls Wrong Again? the average GDP growth in the second and third quarters of election years can have predictive power for who wins the election, with stronger growth favoring incumbents. However, we also point out that recessions close to elections have favored challengers, sending some conflicting market signals heading into Election Day!

As the economy moves forward in the fourth quarter, we’ll continue to monitor real-time data indicators to gauge the impact of rising COVID-19 cases on consumer and business behavior.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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All index and market data from FactSet and Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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