This strong rebound should be short-lived as Q4 macroeconomic conditions will be much less favorable to growth. It will probably be towards the end of 2021 before we return to previous levels of GDP, and if the next surge of COVID-19 causes even more shutdowns, it will be longer than that. Almost all of the gains came from consumption which rose at 40.7% in the quarter. But the split is important; spending on durables (especially cars) rose 82.2% while services rose 38.4%, mostly on healthcare, but there was much less spending on discretionary items.
The data clearly showed the impact of the CARES Act and the boost it gave to personal income. But that boost is now long gone, and it seems like a new stimulus package will not deliver cash to consumers anytime soon. Congress must act as moratoriums on evictions will be ending, consumer delinquencies are piling up, and there are even increased incidences of hunger.
The lack of spending on discretionary items in the report, combined with the lack of a stimulus package, imperil both Q4 GDP and perhaps even holiday sales. Leading indicators have already confirmed that the pace of the recovery should be much slower in Q4 2020 for the indeed following reasons:
- The absence of any new fiscal stimulus before year-end as the Congress failed to iron out an agreement. The GDP release confirmed that the size of fiscal transfers was huge in Q2 2020 as government social benefits increased by USD 2.4 trillion while contracting by 1.2 trillion in Q3 suggesting a net impulse of USD 1.2 trillion over the two quarters, which supported the recovery of consumption in Q3. This impulse will disappear in Q4, suggesting a much lower contribution of household expenditure.
- Progress of the US job market has stalled. US initial claims came out at 751K in the week ending October 24th, the lowest level since mid-March albeit significantly above the worst level observed during the subprime crisis (651K)
- Political uncertainties related to the validation of US elections’ outcome will impair the recovery of investment. The net contribution of gross private investment was stronger than our expectations, but a scenario of a strong dispute on ballot counting with potential judiciary consequences and social tensions is likely to make investment operate a pause in its recovery.
- Net external contribution to growth is likely to remain particularly weak as the materialization of a second wave will drag on global trade.
- Inventories are likely to contribute much less to growth as wholesalers anticipated their imports and purchases much more in advance compared with traditional preparation of the end-year season. Indeed they associated Q4 2020 with a period of extremely high uncertainty both at sanitary and political levels and preferred build stocks earlier in the year compared with a normal year.
The overall stringency level of the US, mirroring the average strictness of confinement across the US, is likely to increase amid confirmation of a brisker and more brutal than the expected second wave of contagion. We are currently at a level of 66 in October compared with a peak of 73 in June. We don’t exclude a level of stringency at the end of the year above the peak of 73. In such circumstances, we cannot exclude a scenario of negative growth in Q4 2020
