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How the U.S. economy powered through Q3

The U.S. economy was resilient in the third quarter, with sales and growth powering higher despite the persistent coronavirus pandemic, increased uncertainty about the future and Congress' inability to pass another spending package to help struggling small businesses and unemployed workers.

Driving the news: Bank of America on Monday revised its third quarter growth forecast to 33%, up from 27%, and just below Goldman Sachs’ recently revised forecast for a 35% jump, up from 30%.


  • While both are well above the Wall Street average (consensus is for 25.9% growth, per FactSet), the two heavyweights' lofty predictions highlight a theme of improved expectations.

What happened: Even with fewer businesses open and social distancing restrictions in place, Americans increased their spending significantly, especially on vehicles, furniture, home renovations, electronics and at big box retail stores.

  • August's U.S. retail sales report showed a 2.6% increase from August 2019 and total sales for the June–August 2020 period were up 2.4% from the same period a year ago.
  • June and July's increases were thanks largely to direct payments and enhanced unemployment benefits paid by the government, but even after they expired Americans kept spending.

What we're hearing: "I have been surprised that we have continued to recover with the horrific death toll that we have seen in the United States and about 40,000 [COVID-19] cases a day at the moment," Chicago Fed president Charles Evans said during a virtual speech to the National Association for Business Economics (NABE) conference.

  • "We seem to be powering through some horrific personal costs and we're just going to have to see how that plays out and what the toll will be on consumer confidence going forward."

Yes, but: Concern is shifting to the fourth quarter and beyond, as economists are writing down Q4 and full-year expectations.

  • "The big bounce is largely mechanical, and the road will be more difficult from here," S&P Global analysts said in the latest global macro update, provided first to Axios.
  • "Momentum is already beginning to fade. Challenges include protecting those hardest hit, keeping viable firms afloat, and facilitating necessary structural change."

The big picture: Most economists and strategists still expect U.S. and global GDP to be sharply negative for the year — even BofA projects the U.S. economy will contract 3.6% overall in 2020.

  • Others like NABE and S&P revised up their 2020 expectations to smaller contractions but reduced their outlooks for 2021.
Data: U.S. Bureau of Economic Analysis; Chart: Axios Visuals

The historically elevated U.S. personal savings rate likely helped consumers continue spending in August.

  • The rate declined from 17.8% in July, but was still the highest since June 1975, excluding the pandemic-induced jump.

Why it matters: "Consumption drives nearly 70% of the economy, and with many service-oriented businesses only reopened partially, and with high unemployment reducing households’ ability to spend, the engine of the economy [is] impaired," JPMorgan Asset Management chief global strategist David Kelly said in a recent presentation.

By the numbers: U.S. personal income declined 2.7% and disposable income fell 3.2% last month, the Commerce Department reported on Thursday.

  • However, spending still rose for the month and is up 40.3% on a three-month average annualized pace, RSM chief economist Joe Brusuelas pointed out in a recent note.

The last word: "The latter is part of the rebound narrative that will likely result in a third-quarter gross domestic product increase that arrives above 30%, while the former clearly indicates that the pace of spending is slowing," Brusuelas said.

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