skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

ECONOMY
October 29, 2020

Real GDP Grows at 33.1% Rate in 3Q, Led by Resurging Goods Sectors

By Michael J. Bazdarich, PhD

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Real GDP grew at a 33.1% annualized rate in 3Q20. Context is everything, so let’s recount the various perspectives of this number. First, it is far and away the fastest quarterly growth rate ever recorded for the US. Then again, it follows far and away the sharpest quarterly decline ever recorded.

The arithmetic is such that a 33.1% rate of gain in 3Q20 does NOT fully offset the 31.4% rate of decline in 2Q20. [The arithmetic is that (1+33.1%)*(1-31.4%) < 1.] Rather, the 3Q20 level of GDP remains 2.2% below the 1Q20 level and 3.5% below the 4Q19 level.

By way of comparison, in 2Q09, at the trough of the recession triggered by the global financial crisis, GDP was down 4.0% from its previous cyclical peak (six quarters earlier). In other words, even after 3Q20’s torrid rate of growth, the economy is still below its 4Q19 peak almost as much as it was at the trough of the horrendous 2007-09 recession.

The final perspectives we’ll offer are the two we think most salient. Despite the gaping net decline in GDP still in place, there is no question that the economy’s recovery has been dramatically stronger than anyone would have ventured to guess. Back in May, nobody we know of was predicting 3Q20 growth anywhere north of 20%, and if anyone had been brash enough to predict 30-something percent growth, they would have been laughed down (shamed?). If this is not a V-shaped recovery, what is?

Furthermore, a glance within the components of GDP indicates that the recovery has been virtually complete wherever social distancing and continued shutdown have not gotten in the way. The goods sectors within GDP grew at a staggering 59.5% annualized rate in 3Q20, and the level of 3Q20 goods sector GDP was actually 2.3% above pre-Covid (1Q20) levels.

Exhibit 1: Real GDP Growth By Major Sector
Explore Real GDP Growth By Major Sector.
Source: Bureau of Economic Analysis. As of 30 Sep 20. Select the image to expand the view.

Construction GDP grew at a 16.4% annualized rate in 3Q20 and was within 2.1% of its pre-Covid levels. With pipeline problems inhibiting construction spending in 3Q20 and with new-home sales and starts remaining at elevated levels, construction GDP is sure to register even stronger growth in 4Q20.

The epicenter of weakness in the economy remains in services, where Covid strictures continue to inhibit. While services GDP rose at a nice 24.1% clip in 3Q20, that followed a 32.9% rate of decline in 2Q20 and left 3Q20 services GDP 6.3% below pre-Covid levels. Service sectors are likely to register another good growth rate in 4Q20. However, at the end of 2020, the remaining weakness in the economy is all but sure to be in these services sectors, and that weakness is likely to remain until vaccination or herd immunity allow a more complete reopening of such service venues as restaurants, theaters and resorts.

The threat of renewed shutdowns remains the biggest downside risk for the economy. From what we have read lately, “the science” would not support such renewed lockdowns, but the politics might take us there anyway.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.