The world’s largest economy was hit by a bus. It’s healing, but slowly.

To understand what the latest numbers on US gross domestic product are telling us, imagine you are an obsessive sort who takes various measures of your health every day, puts those readings into a spreadsheet, and then every three months averages those daily numbers to get a summary of whether you are getting better or worse.

Then, around mid-March, you’re hit by a bus.

You spend the last two weeks of March in a hospital room with catastrophic injuries. But because you had been perfectly healthy for the first 2 1/2 months of the quarter, your average for that quarter shows only a modest worsening of your condition.

This patient still has a long road ahead to full health, with a lot that could yet go wrong.
This patient still has a long road ahead to full health, with a lot that could yet go wrong.Credit:Louie Douvis

The second quarter, though, shows a different story. It covers a time when you were still in the hospital barely able to move (April), and then the time when you were home to begin healing and rehabilitation (May and June). But your average health level for those three months still showed a disaster compared with the first quarter.


Which brings us to the third quarter. The entire period, July through September, represents a time when you are healing. Gone are the days when you were confined to a hospital bed; you can move around a little bit, regain some strength in atrophied limbs, cut back on pain medication.

Your average health reading would show remarkable improvement over the second quarter — probably the steepest rate of improvement you had ever experienced — yet you might still be in profound pain and a considerably less healthy person than you were before the accident.

Sharpest improvement

Likewise, the US economy. On Thursday, the third-quarter number showed the sharpest improvement on record (a 7.4 per cent rise in GDP, when you skip the convention of using annualised numbers that generate misleading results in a year like 2020). But it also left economic output 3.5 per cent below where it was in the last pre-pandemic quarter, equivalent to a severe recession but not a collapse in activity.

More so than those headline numbers, though, the details of the new GDP numbers show the shifting composition of the pandemic-era economy, and give hints of where the damage remains severe, and what it might take to regain full health. To carry through the analogy of our health-monitoring patient who was hit by a bus, it tells us which limbs are as good as new and which will require many years of rehab.

To start, a remarkable shift really has taken place: Americans are buying fewer services, but are shifting those expenditures to buy more stuff. Consumer spending on services in the third quarter was at an annual rate $US660 billion lower than in late 2019, while spending on goods was up $US325 billion.

It’s a simple and straightforward narrative. Much of the money that people are not spending on restaurant meals and hotel stays (down 19.5 per cent) and sports events (recreation services down 32.4 per cent), they are instead spending on cars (motor vehicles up 7.9 per cent) and home gym equipment (recreational goods and vehicles up 21.3 per cent).

(Those numbers, and those that follow, are seasonally adjusted comparisons of the newly released third-quarter numbers with the fourth quarter of 2019.)

Seven months after being hit by the bus, this patient still has a long road ahead to full health, with a lot that could yet go wrong. But being on the mend beats the alternative.

That said, the loss of services spending remains greater than the gain in goods spending, and total consumption spending remains 3.3 per cent below pre-pandemic levels — implying a continuing shortage of demand in the economy. And spending levels have been propped up by stimulus checks and expanded unemployment insurance benefits, both of which have gone away amid a stalemate in Washington over additional relief. This could mean families’ ability to keep up spending will come under pressure through the winter.

Another major area of loss offers some alarm. US exports of services are 25 per cent below pre-pandemic levels, representing a $US193 billion annualised loss of economic activity. In the math of GDP, spending by overseas tourists and tuition paid by international students count as services exports, so it is no surprise these numbers are down.

But it is plausible that domestic spending will snap back faster than international spending once public health concerns start to ebb. You could imagine that Americans will return to their neighbourhood restaurant more quickly than Chinese tourists will begin filling up New York City hotels again.

Other lines in the GDP tables show a mix of worrying and reassuring signs. For example, the housing sector has been a welcome source of economic strength, with residential investment up 5.1 per cent (that new deck your neighbour is building is contributing to those numbers).

But business investment is not so strong, suggesting that the corporate sector is acting with caution in ways that could have lasting consequences.

Some of that we can chalk up to the direct effects of the pandemic. Investment in transportation equipment is down 21.9 per cent, and on entertainment products down 12.2 per cent. Presumably those numbers will rebound when people start flying again and when film sets can more easily operate without risking the health of all involved.

But investment in nonresidential structures (think warehouses and office buildings) is 14 per cent below pre-pandemic levels; spending on industrial equipment is down 3.7 per cent; and research and development spending is off 4.2 per cent. That is evidence of a broader contractionary mind-set in American business, consistent with a mild recession.

Finally, while federal spending has held steady, there is already evidence that state and local governments, with plunging tax revenue, are being forced to cut back in ways that could prove protracted. Their spending was only 1.9 per cent below pre-pandemic levels in the third quarter, but historically they have experienced lagged effects of a recession, meaning there could be more damage yet to come.

Seven months after being hit by the bus, this patient still has a long road ahead to full health, with a lot that could yet go wrong. But being on the mend beats the alternative.

The New York Times

Most Viewed in Business

Source: Thanks