PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

GDP: The Economy’s Partial Snap Back in the Third Quarter

By at 29 October, 2020, 2:48 pm

by Raymond J. Keating-

How can an incredible annualized real GDP growth rate of 33.1 percent, according to the latest report from the U.S. Bureau of Economic Analysis, be expected? When it comes after declines of 31.4 percent in the second quarter and 5.0 percent in the first quarter.

It must be understood that even with this snap back in the third quarter, real GDP remains well below where it was at the close of 2019.

Source: Federal Reserve Bank of St. Louis, FRED

The good news, though, is that the economy did, in fact, have a record growth rate in the third quarter, as a result of large portions of the economy reopening after various government shutdowns, with a portion of lost jobs also regained. The resiliency of American entrepreneurs, businesses and workers is on full display in these numbers.

After breathtaking declines in the second quarter, there were almost as dramatic bounce backs in key parts of the GDP measure, as noted in the following table:

With the wild swings in the last two quarters, another way to look at where real GDP stands compared to the previous year is to look at the change in average quarterly GDP over the first three quarters of 2020 versus the same period in 2019. (Year-to-year GDP growth rates are calculated in this way, i.e., comparing the average for the four quarters in each year.) This actually offers the best estimate of where the annual rate change in real GDP stands right now for 2020. That measure tells us that the economy has declined by 3.9 percent so far this year. Even with if achieve some additional growth in the fourth quarter, the U.S. is on track for the largest year-to-year decline in real GDP during the post-World War II era.

Nonresidential fixed investment – or business investment – is always critical to examine, given that such investment not only factors into the current GDP but provides the foundation for future growth.

Again, looking at the change in average quarterly nonresidential fixed investment over the first three quarters of 2020 versus the same period in 2019, business investment declined by 5.1 percent. If this generally holds for the entire year, it would be the fifth worst year since the end of World War II.

One final point as we look ahead, and hope for recovery and expansion: Even without another downturn in growth, the U.S. economy is looking at not getting back to the 2019 level of real GDP until 2022 – never mind getting back to where we should be if we were growing at the historic average.

Much work lies ahead, and we need robust entrepreneurship and private investment to get us there. Obviously, increases in taxes and regulations would slow the recovery, while pro-growth tax and regulatory relief would quicken recovery and help growth in becoming more robust and sustainable.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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