Sharp GDP Rebound Will Falter In The December Quarter
U.S. GDP rebounded sharply in the September quarter with growth of 33.1%. However, the record increase was due to the rebound from the June quarter’s record fall of 31.4% and the March quarter’s decline of 5.0%. When all three pandemic impacted quarters are taken into account the economy has shrunk by 2.9% from a year ago and 3.5% since the end of last year.
The chart below from Gregory Daco, Oxford Economics Chief U.S. Economist, shows how the economy was generating low 2% year-over-year growth prior to the pandemic (the green line) and how it fell of a cliff in the June quarter (the blue bar) and rebounded in the September quarter. Daco is estimating that the economy in the December quarter will continue its rebound, but at a much lower rate. Overall economic output could still be 2.4% lower than it was last year. Since the Bureau of Economic Analysis reports GDP growth on a quarter-to-quarter basis this should translate to about 4.5% growth in the December quarter.
Early projections are for low single digit growth
Given everything that has been going on with the economy, the Federal Reserve Bank of Atlanta’s GDPNow estimate for the September quarter was pretty accurate at 37%, while the average Blue Chip consensus at just below 30% as of early October was even closer. While it is very early in the December quarter, the GDPNow forecast is 2.2% growth with the Blue Chip consensus coming in around 4%, as of early October.
Economic trackers show a flattening recovery
Jefferies chief economist, Aneta Markowska, has developed an Economic Activity Index to help determine how well the economy is recovering from the pandemic lockdown. The Index includes, “national transit use, auto congestion, flight activity, job listings, web traffic to unemployment portals, time clocked by hourly workers, foot traffic to consumer discretionary verticals, retail web traffic, restaurant bookings, mortgage applications, railroad traffic, steel production, and petroleum supply. Constituents are grouped into five buckets, representing movement, employment activity, consumer behavior, housing and industrial production.”
As you can see from the Index below economic activity was almost halved from the beginning of the year to the middle of April. It rose nicely until late June and then saw a slowdown in its recovery. Over the past few weeks it has started to flat line with it only moving from the high 70’s to 81 as of October 23.
Gregory Daco at Oxford Economics tracks seven metrics to gauge how the economy is performing. After making no progress from late August to late September/early October the Recovery Tracker has had a small decline.
If the recent rise in Covid-19 cases, hospitalizations and deaths continue it would not be surprising to see these trackers move back down as either people become more cautious or governments impose restrictions.
NY Fed indicator showing progress but at a slow rate
One Index that forecasts yearly GDP growth rate is the New York Feds Weekly Economic Index or WEI. It estimates the yearly growth rate if current conditions were to continue for a year.
The WEI is an index of ten indicators of real economic activity, scaled to align with the four-quarter GDP growth rate. It represents, “the common component of series covering consumer behavior, the labor market, and production. The WEI is not an official forecast of the Federal Reserve Bank of New York or its president, the Federal Reserve Bank of Dallas or its president, the Federal Reserve System, or the Federal Open Market Committee.”
Its components are:
- Initial unemployment insurance claims
- Continuing unemployment insurance claims
- Federal taxes withheld
- Redbook same-store sales
- Rasmussen Consumer Index
- The American Staffing Association Staffing Index
- Raw steel production
- U.S. railroad traffic
- U.S. fuel sales to end users
- U.S. electricity output
During the first two months this year the Index was showing yearly GDP growth ranging from 1.2% to 2%. It started to turn negative in late March and its lowest reading was negative 11.5% in late April.
As shown in the chart it has had a fairly consistent increase from its weakest point. As of October 29 it is showing the economy would decline 3.3% over the next year at current economic activity.
It appears to be on track for December GDP growth to decline in the low single digits year over year. This should then translate to the economy growing in the low to mid-single digits as it is calculated on quarter-to-quarter growth.
Slowdown in job growth
While new unemployment claims and the number of people receiving benefits continue to decline, they are still at historically elevated levels. Additionally, the number of jobs being added each month has been smaller each month for the past three months. Even if the number of jobs added moves back up, there will still be about 10 million more people unemployed than there were before the pandemic hit.
Consumer confidence, as measured by The Conference Board, dropped from just over 130 in early 2020 to as low as 85 in April and May and then again in August. It had a sharp rebound to 101.3 in September and slipped slightly to 100.9 in October.
There are some major differences between its components. The Conference Board said, “The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – increased from 98.9 to 104.6. However, the Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – decreased from 102.9 in September to 98.4 this month.”
It may be that the increased number of coronavirus cases, and the concern they could further rise as the weather gets colder, has led to the Expectations Index dropping.