Raymond Carver’s 1981 collection of short stories, “What We Talk About When We Talk About Love,” addressed the everyday lives of the working poor who are left to deal with financial problems, failed careers and shattered relationships.
We are forecasting a 35.5% increase in GDP at a seasonally adjusted annualized rate.
That is a fitting analogy for how we ought to discuss the third-quarter report on gross domestic product, which comes out Thursday and will almost certainly contain the greatest increase ever in top-line quarter-over-quarter growth.
We are forecasting a 35.5% increase at a seasonally adjusted annualized rate, but the report will illustrate an enormous gap between actual and potential output that will take some time to close.
It is not just the size of the rebound that should be of paramount interest. Rather, policymakers should focus on the size of the economic gap that has left small firms, and the poor and working class, struggling to keep up. The pandemic-induced economic shock has produced long-term economic scarring that requires well-designed, targeted and significant policy action to get the economy back to producing at full potential.
Even with a record rebound in GDP, it will take at least another two years before growth nears its potential.
Even with a record rebound in GDP, it will take at least another two years before policymakers can start talking about economic growth nearing its potential. And that prospect assumes that there is substantial policy aid, in contrast with the current impasse, which will almost surely define the remainder of the year.
For example, if one assumes a 30% increase in top-line growth (the Bloomberg consensus is 32%), that is equivalent to a 3.5% decline in the year’s overall rate, which is consistent with the median growth forecast put forward by the Federal Reserve. Based on our estimate, that will close a little more than half the output gap caused by the pandemic.
The gap and the rebound are both significantly larger than those observed during the financial crisis, and we expect that from here on in, the closing of the spread between real and actual output will slow considerably back toward growth rates at or near the long-term potential rate of just under 2%.
We expect top-line growth near 35.5% in the third-quarter estimate, which will be driven by a nearly 40% increase in household consumption. Also pushing the growth will be kinetic increases in outlays on fixed business investment and what will almost certainly be an upside surprise to inventory restocking as the economy reopened. It is clear from the data that spending on equipment surged in the quarter, and we will obtain more data on inventories and trade in the coming days that will help fill in the picture.
It is critical that these numbers be put in the context of the substantial output gap and the serious policy impasse in Washington that has left millions of poor and working class people out of work and facing the most sour holiday season in just about anyone’s memory.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
