Sharp third-quarter growth will show the economy regaining ground, but it’s still in a hole

Third quarter GDP is expected to grow at a sharp double digit pace, but the economy is still behind where it was earlier in the year and may be challenged by a lack of fiscal stimulus. 

Economists expect GDP increased by 32% in the third quarter, after a stunning contraction of 31.4% in the second quarter, when the economy shutdown, according to Dow Jones. The report on gross domestic product is expected at 8:30 a.m. ET Thursday.

“We will have recovered about 2/3 of the GDP we lost in the recession,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi expects growth of an above consensus 35% for the third quarter.

“I think most of that growth came at the end of the second quarter, coming into the third quarter. May, June, July were very strong months. That’s when businesses were reopening,” he said. “August was okay, September kind of went flat into October. I think the economy is moving very sideways.”

Diane Swonk, chief economist at Grant Thornton, expects growth of 33%. “You’re still in a deep hole. The hole in the labor market is deeper than GDP,” said Swonk.

Swonk said a big factor in the third quarter was strong consumption, and consumer spending was directly helped by the enhanced unemployment given to workers until it ran out at the end of July.

“The concern is we get another setback in the fourth quarter,” she said. “November and December could be materially worse. The problem is you’re going into the critical season for celebrations and gatherings. If we continue to see the spread, we can’t reflate the economy,” she said.

Economists said there are concerns that the spread of coronavirus will result in more sluggish growth, limiting activity and encouraging consumers to stay away from stores and restaurants.

At the same time, the failure of Congress and the White House to reach an agreement on stimulus makes it more likely there will be no stimulus aid until next year, depending on the election outcome.

If President Donald Trump does not win re-election he is not expected to be motivated to push for another spending package before he leaves office. Senate Republicans were far apart from the White House and Democrats on the size of a stimulus and also may not seek a package if the president loses the election.

“There is a window in the lame duck session, where they have to pass a piece of legislation by Dec. 11 to fund the government. That’s an opportunity to pass a package,” Zandi said. But odds are higher for a package early in the new year.

JPMorgan economists raised their forecast for third quarter growth to 36.7% from 35.1% after stronger durable goods and the advance economic indicator report revealed stronger data on equipment investment, net exports and inventories than expected. .

“Even with this upgraded forecast and what is almost certainly going to be a record-setting growth rate reported for 3Q, we think that real GDP should still be down about 3% between 4Q19 and 3Q20 (not annualized),” the JPMorgan economists noted.