US economy bounces back as voters head to polls

The US economy rebounded in the third quarter, with GDP rising an unprecedented 33.1% at an annualised rate.

Consumer spending and capital investment led the charge as lockdowns were lifted and pent-up demand buoyed sales. No doubt President Trump will make as much political capital as possible from the figures as he tries to overhaul Joe Biden’s lead in the presidential election.

However, although the turnaround looks impressive, the headline number was close to expectations and still leaves the US economy 3.5% below where it was at the end of last year before the virus struck. Consequently, unemployment remains well above pre-Covid levels at 7.9%.

The GDP figures also highlighted the split between the goods and service sectors, with consumer spending on the former now 6.7% above pre-pandemic levels, while services are 7.7% below.

The gap will not be helped by the latest increase in Covid-19 cases, which has led to local restrictions being reinforced with a focus on restaurants and bars. 

We should see further strength in the industrial sector as surveys indicate that stocks of unsold inventory are low and orders have risen – a combination which points to stronger activity in the current quarter.

Looking further ahead though, as pent-up demand fades the economy will need another shot in the arm. The failure of Congress to agree on a fiscal package before the election creates the prospect of a fall off in spending in the new year.

The Federal Reserve meets next week, but it has already delivered significant monetary stimulus and chair Powell has made it clear that another fiscal boost is needed.

The immediate danger of a disputed election next week seems to be fading as the high turnout points to the opinion polls being accurate and delivering a clear result in the presidential race.

The Senate, however, could remain in Republican hands, leaving Biden with the challenge of overcoming the current gridlock in Congress.