GDP recovery has a 'long way to go,' experts say
Gross domestic product on a monthly basis has reclaimed the losses suffered as a result of the economic shutdown to stop the spread of the coronavirus, according to Fitch Ratings, but output remains below pre-pandemic levels and will for some time, experts agree.
"The monthly flow of US economic output was back to within 2% of the January 2020, pre-virus level by August," the rating agency said. And GDP could surpass the 5.7% third-quarter non-annualized estimated gain, Fitch said, "Even assuming that activity remains flat in September from August," the gain would be 7.9%.
GDP dropped 5.0% on an annualized basis in the first quarter, as COVID-19 was taking hold and the shutdown began, and plunged 31.7% in the second quarter, when the closures had the greatest impact and longest duration.
And the overall economic recovery and rebound in GDP depends on the containment of the virus and or the introduction of a vaccine or treatment, but generally economists see a better read in the third quarter, but levels will remain below pre-pandemic levels.
Tom Porcelli, chief U.S. economist at RBC Capital Markets expects a “sizable bounce back” in the third quarter. “It could easily be up 40% but as far as getting back to pre-pandemic levels that might not happen until the end of next year, maybe,” he said. “That would make recovery in total around 1.5 years, it took seven years to get back after the great financial crisis.”
A 30% rise in the quarter seems likely to Rhea Thomas, senior economist for Wilmington Trust. “Even with a gain of that size, GDP would still be 4% behind pre-pandemic levels,” she said. “We think we will reach positive growth on a year-over-year basis in the second quarter of 2021."
Monthly figures and annualized figures can be misleading, noted Greg McBride, senior vice president and chief financial analyst at Bankrate.
"Changes in GDP are expressed at an annualized rate, which is a bit like taking the baseball player that hits 3 home runs on opening day and projecting that he hits 3 home runs every game all year long,” he said. “The record second quarter contraction of GDP was at an annualized rate, but the economy contracted 9.1% during the quarter, not by nearly one-third."
And while he expects record expansion in the third quarter, he noted, a 31.7% rise would "not offset the 31.7% contraction in the second quarter. Just as a stock investor that sees a 33% loss needs a 50% gain to get back to even, a 31.7% contraction requires a 46% rebound to erase it."
With the hospitality sector still reeling, Mike Chalker, portfolio manager and senior analyst at LM Capital Group, believes a return to 2019 levels won’t occur until the third quarter of 2021. “Without full participation from all sectors of the economy it will be tough to return to pre-COVID GDP levels,” he said. “Until we see a return to a pre-COVID normal running average, we expect to see a few quarters of rapid growth followed by a period of stagnant or zero growth, possibly even a dip, before returning to a stable growth period. GDP should grow about 3% in the second half of 2020.”
It's "too early," he said, to predict when the next positive read will be. “There are a number of significant events (mainly political and monetary policy in nature) that could sway this expectation either way,” according to Chalker. “The ongoing recovery is shifting the makeup of our economic structure and investors should be prepared to dig deeper into all data points to see these changes and find where the strengths begin to overcome the weaknesses — that’s when we’ll start to see a light at the end of the tunnel. One thing to keep in mind is, as more people go back to work the comparison is easy against Q2 but there are still over 20 million people unemployed and spending has contracted.”
Future lockdowns to contain COVID-19 outbreaks will be “far more limited in scope,” said Jim Solloway, chief market strategist, investment management unit at SEI.
“For developed countries, at least, treatments have improved and vulnerable populations appear to be better-protected than was the case in the initial months of the pandemic,” he said. “The latest reading aligns with a year-over-year GDP decline of 5.1%; using a 13-week moving average to reflect the quarterly nature of GDP, it suggests that third quarter GDP will be still be 6.4% below its year-ago level.”
McBride added, the economy is “unlikely” to reverse the first half contraction by year-end, and “might not” by year-end 2021 either. “Much depends on the path of the virus, but it will take a while to dig out of the hole dug during the first half of the year."
Jason Celente, senior portfolio manager at Insight Investment, said the bottom line is: if you remove the “annualizations” of the quarterly GDP numbers, then you realize U.S. economic growth fell by over 10% from its peak. “It takes more than 10% growth from the new lower number in order to recoup your losses — or your $90 would have to grow by 11.1% in order to recoup the $10 lost from your $100 investment,” he said. “The BEA equivalent of a full recovery in this example would be a 52% growth reading versus the current 30% estimates for the third quarter. So the recovery is off to a very good start, but we have a long way to go.”