Takeaways from Today’s U.S. Q3 GDP Report

The U.S. Q3 GDP growth boost to 33.4% from 33.1% slightly beat our estimate thanks to bigger than expected boosts for business fixed investment in equipment and intellectual property. As a result, final sales growth was lifted by slightly more than expected, to 25.9% from 25.6%. We saw the largely expected $0.6 bln inventory boost and -$3.7 bln subtraction for net exports, alongside modest lifts for consumption, and both residential and public construction.

We saw the expected modest trimming for nonresidential construction. We have a record-setting Q3 GDP growth rate that is nearly double the 16.7% prior high in Q1 of 1950. The bounce reversed 66% of the GDP plunge in Q1-Q2, and leaves GDP -2.8% below the level in Q3 of 2019. We will leave our Q4 GDP estimate at 6.0% for now. The gain would leave a 2.0% Q4/Q4 gain, versus the Fed’s -2.4% median estimate.

  • We saw Q3 GDP growth boost to 33.4% from 33.1%, after contraction rates of -31.4% in Q2 and -5.0% in Q1.
  • Final sales grew at a 25.9% (was 25.6%) pace in Q3, after contraction rates of -28.1% in Q2 and -3.6% in Q1.
  • Consumption grew at a 41.0% (was 40.6%) pace in Q3, after contraction rates of -33.2% in Q2 and -6.9% in Q1.
  • Business fixed investment grew at a 22.9% (was 21.8%) pace in Q3, after contraction rates of -27.2% in Q2 and -6.7% in Q1.
  • Residential investment grew at a 63.0% (was 62.3%) pace in Q3, after a -35.6% contraction rate in Q2 but a 19.0% Q1 gain.
  • Exports grew at a 59.6% (was 60.5%) pace in Q3, while imports grew at an unrevised 93.1% rate.
  • Government purchases contracted at a -4.8% (was -4.9%) pace in Q3, after growth rates of 2.5% in Q2 and 1.3% in Q1.
  • We saw Q3 chain price gains of 3.5% (was 3.6%) for the headline and 3.4% (was 3.5%) for the PCE core.

The revised GDP data still reveal a powerful Q3 rebound led by household consumption and residential investment, alongside a big bounce in equipment spending and a rapid reversal of the out-sized Q2 inventory liquidation rate.

The Q3 bounce was restrained by a powerful surge in imports that sharply exceeded the bounce in exports, as much of the U.S. inventory build was fed by imported goods, alongside weakness in nonresidential investment in structures. We also saw a Q3 drop-back in government purchases after a CARES Act boost in Q2. Most of the CARES Act expenditures were transfer payments that don’t enter this GDP component.

The Q2-Q3 GDP gyration captures the powerful impact of mandatory closures, which left Q2 contraction rates of 20%-40% for most measures of demand that were followed 30%-40% bounces in Q3, alongside larger 55%-65% Q2 declines for foreign trade that were followed by gains of about 60%-90% in Q3. We also saw a huge inventory liquidation over the four quarters through a -$3.7 (was -$4.3) bln Q3 rate, following a -$287.0 bln record-pace in Q2. The chain price index dropped -1.8% in Q2, leaving the weakest reading since 1949, before the 3.5% Q3 bounce.

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The two-quarter GDP collapse in the first half of 2020 was the largest on record and was followed by the largest rebound on record in Q3, hence capping the longest expansion on record. The last expansion reached its peak in February according to the NBER, and we believe that April should be chosen as the cyclical trough, though May could be chosen given lingering turns in some sectors. Either a two or three-month recession would be the shortest on record, since the six-month recession in 1980.

Today’s GDP report revealed a downwardly revised Q3 personal income growth rate of -10.2% (was -10.0%) for total income and -13.2% (was -12.9%) for disposable income, after respective Q2 rates of 35.8% and 46.2%. The savings rate fell to 16.0% (was 16.1%) in Q3 from 26.0% in Q2, as CARES Act payments boosted Q2 income by substantially more than the pandemic depressed it, followed by an unwind of CARES Act payments in Q3 alongside an underlying income rebound.

The GDP data imply a Q3 productivity growth boost to 5.3% from 4.6%, after an unrevised 10.6% Q2 gain. We expect a 44.1% (was 43.4%) Q3 growth for the BLS output measure, following a -36.8% Q2 contraction rate. We expect an unrevised 37.1% Q3 growth rate for hours-worked, after an -42.9% Q2 drop. We expect Q3 growth in compensation per hour of a slightly stronger -2.1% (was -2.3%), after a 24.3% Q2 clip. The mix should leave Q3 unit labor cost growth of -7.1% (was -6.6%), after a revised 12.3% Q2 pace.

 

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