The record decline in US output in the second quarter is expected to post a strong but partial recovery in the upcoming Q3 GDP report, according to several recent nowcasts compiled by CapitalSpectator.com.
Economic activity is projected to rise nearly 21% in real terms on an annualized basis, based on the median nowcast. That’s a huge increase relative to the historical record, but it pales next to Q2’s dramatic 31.7% collapse. Even if the anticipated bounce arrives, the economy’s output will remain well below the pre-pandemic level. The Bureau of Economic Analysis is scheduled to publish its first Q3 GDP estimate on Oct. 29.
Despite the expected rise in Q3, by one economist’s estimate the US economy still needs another huge dose of stimulus to repair the damage from the coronavirus fallout: $3 trillion, says William Lee, chief economist at Milken Institute. “I think the one thing that everyone … agrees with is we have to get in there and get in big,” he told CNBC on Wednesday. “The issue is how do you get big without a permanent increase in fiscal deficit?”
Despite the need, the political climate at the moment isn’t encouraging for expecting that a new stimulus program will arrive soon, if at all. “At least today, I’m not getting good vibrations about any kind of agreement until after the election,” advised Bill Hoagland, senior vice president at the Bipartisan Policy Center and a former Senate staff member. “Unless something were to break, and pressure really builds, it’s going to be extremely difficult to find a package,” Hoagland said this week.
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The good news is that there appears to be an economic tailwind blowing. Sentiment data is projecting a solid bounce for US economic activity, based on August data. The IHS Markit US Composite PMI Output Index, a GDP proxy, rose to 54.6 last month – moderately above the neutral 50 mark that separates growth from contraction. The rebound reflects the strongest increase in nearly 18 months.
“Combined with the stronger picture emerging from manufacturing in August, the improved performance of the vast service sector adds to signs that the third quarter will see an impressive rebound in the economy from the collapse seen in the second quarter,” said Chris Williamson, chief business economist at IHS Markit last week. “However, the survey also highlights how the rebound is very uneven and the recovery path remains highly uncertain.”
By some accounts, the potential for a robust recovery beyond Q3 can’t be ruled out. “One thing that I think is overlooked or underappreciated today, are the odds — and this is not my baseline forecast — but the odds that 2021 could actually be one of the best years for the economy in history, which sounds ridiculous given what we are dealing with right now,” said Morgan Housel, a partner at the Collaborative Fund, earlier this week.
The critical factor, of course, remains the path of the coronavirus and the timing of a vaccine that’s effective, widely distributed and accepted by the general population. Several reports indicate the possibility that a vaccine could be available in the next several months, although Dr. Francis Collins, director of the National Institutes of Health, urged caution on expecting a relatively quick solution.
“Certainly, to try to predict whether it happens on a particular week before or after a particular date in early November is well beyond anything that any scientist right now could tell you and be confident they know what they are saying,” Collins told a Senate panel on Wednesday.
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