Outlook and Market Review – Third Quarter 2020

The COVID recession in first half of 2020 was the shortest but most severe downturn in history with a 31.4% decline in GDP in the second quarter. The third quarter began with a resurgence of the virus as the economy reopened on a limited basis. Still, revised third quarter growth was an impressive 33.1%, largely due to a bounce back from a low GDP level. The rebound was fueled by unprecedented stimulus spending, low interest rates, high levels of household savings, rising stock values, and pent up demand for goods. Approximately 22 million jobs were lost in the recession and about half of that total has been recovered. The unemployment rate now stands at 6.7% but added gains in employment will be slow in the coming quarters as worker skills erode and many businesses do not reopen. Pandemic related changes in the economy will affect the labor market going forward, to include fewer face-to-face business interactions and restructuring the labor component of business.

Retail sales actually ended higher in the third quarter than the level achieved at the end of 2019. Consumers demanded fewer services but demand for goods increased due to availability of home delivery. The saving rate fell from an astronomic 26% to 16% in the third quarter, but savings remain at a high level to supplement spending. Historic stimulus and unemployment payments waned in the third quarter just as the virus began a second wave. The fourth quarter is starting out slow and an additional stimulus package somewhere between $900 billion and one trillion dollars is likely by the end of January.

Fourth quarter growth should be modest due to a lack of added stimulus and a strong resurgence of the virus. Interest rates will remain at historic lows and inflation below 2% will continue. The trade deficit will continue to be a drag on growth. While the announcements of COVID vaccines are promising, actual distribution and inoculation will take time and full openings of the economy are not likely until well in to 2021. Overall, GDP growth for 2020 is expected to be about -4.6%. With very low inflation the Fed has free reign to expand the money supply, but it is not clear that monetary actions will have much effect beyond the massive expansion provided already. High levels of additional government spending are likely, both to stimulate the economy and advance the new agenda of the Democratic leadership, especially if Democrats take the Senate in the Georgia special election. Long run consequences of an exploding public debt load approaching 25 trillion dollars are not on the radar screen of political leaders.

The November 20 revisions by the 37 forecasters surveyed by the Federal Reserve Bank of Philadelphia call for a fourth quarter GDP growth of 4%. For the next three years forecasters predict U. S. GDP growth between 2.1% to 4.0% while inflation remains close to the 2% target. Forecasters also predict that the unemployment rate will decline to 5.8% in the fourth quarter of 2021 and 4.6% by 2023. It is not likely that the economy will return to pre-pandemic levels in the foreseeable future. The chances of a double dip recession cannot be ruled out completely but the odds are less than 30%, depending on the course of the virus and vaccine effectiveness.