US Q3 GDP Expected To Rise Sharply As Q4 Outlook Dims

The US economy is still on track to post a strong rebound in the upcoming third-quarter GDP report, but Q4’s prospects appear to be fading, according to recent nowcasts compiled by and analysis by economists.

First the good news. The Bureau of Economic Analysis on Oct. 29 is projected to report that Q3 GDP rose 20.3% (seasonally adjusted annual rate), based on the median nowcast. Although that’s still well below the 31.4% collapse in Q2 (deepest on record), a 20% increase in output would mark the biggest quarterly rise since the dataset’s start in 1947.

Note, however, that there’s a wide range of Q3 estimates for the individual nowcasts. At the leading edge of optimism: Atlanta Fed’s GDPNow model, which is currently projecting a stunning 35.3% increase in real growth (as of Oct. 6), a growth estimate that exceeds the rate of Q2’s decline (although it would still leave GDP below the level in Q1). At the opposite extreme is the New York Fed’s nowcast: a relatively mild 14.1% rise (Oct. 2).

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Although the degree of the bounce is open for debate, most economists and models project a substantial rebound. Considering the broader economic and political context, however, still elicits warnings from analysts.

“There are a lot of potential pitfalls out there,” notes Gus Faucher, chief economist at PNC Financial Services. “We are still dealing with a number of significant reductions because of the pandemic.” He adds that “all this political uncertainty has the potential to weigh on economic growth.”

PMI survey data for September, however, aligns with upbeat Q3 expectations. The IHS Markit US Composite PMI, a GDP proxy, was 54.3 last month, moderately above the neutral 50 mark that separates growth from contraction.

Despite the broad-based economic bounce lately, “Covid-19 worries and social distancing continued to impact many businesses… especially in consumer-facing sectors, where demand for services fell once again,” advises Chris Williamson, chief business economist at IHS Markit, which publishes the PMI numbers.

The Q4 outlook, by contrast, looks far less encouraging at the moment. Although the strong Q3 forecasts are destined to slow, the fear is that the recovery is fading at a worrisome pace. The weaker-than-expected payrolls report for September, for example, may be a warning flag, according to some observers.

The economy added 661,000 jobs last month—a big number on its face, but the slowest monthly gain since the recovery started. After losing a massive 22 million jobs during the coronavirus crash in March and April, roughly 60% of those positions have been recovered.

The September payrolls report “is an illusion of progress at a time when we needed accelerating gains in the labor market. The number of jobs added this month is just not enough,” says Nick Bunker, economic research director at job placement site Indeed. “This report is massively concerning. We are not where we need to be, nor are we moving fast enough in the right direction as we head into fall.”

Complicating Q4’s prospects is President Trump’s tweet on Tuesday that “I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill.”

The announcement, which triggered a sharp drop in the stock market yesterday afternoon, followed Federal Reserve Jerome Powell’s recommendation for additional stimulus.              

Trump appeared to reverse course later on Tuesday, telling Congress to pass coronavirus relief measures that he would sign into law. Nonetheless, it’s fair to say that the Q4 outlook remains murky. The risk of a contentious election that’s challenged by both sides doesn’t help.

The New York Fed’s current Q4 nowcast for GDP growth is just 4.8%. The question is whether this relatively moderate gain, well below what’s expected for Q3, declines further in the weeks ahead. It’s still early in the quarter and so a lot can (and probably will) happen between today and the end of the year. But with worries that the coronavirus is rebounding as cold weather sets in, combined with unusually high election risk and shaky prospects for more economic stimulus, 2020’s final months could be a bumpy ride.

“Without faster job growth — unlikely at this stage of the recovery — or increased fiscal aid, households, businesses and state and local governments will be increasingly susceptible to a deterioration of the health situation,” warns Gregory Daco, chief US economist at Oxford Economics. These factors will weigh on GDP, raising the risk that the economy decelerates to “stall speed,” he says.

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By James Picerno

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