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Q3 GDP: US economic activity rose at a record 33.1% annualized pace after pandemic-induced slump

Yahoo Finance’s Brian Sozzi and Alexis Christoforous react to the U.S. GDP report and discuss the state of the economy with Barclays Chief U.S. Economist , Michael Gapen.

Video Transcript

ALEXIS CHRISTOFOROUS: Good morning, Michael. Well, first off, what do you make of the GDP numbers?

MICHAEL GAPEN: Well, some of this is mechanical, as you mentioned. We had a very sharp contraction in Q2, big, big rebound in Q3. That's driven by those lockdown orders and then the removal of those lockdown orders. So some of this is a bit mechanical.

What I make of it, really, is that the snapback in the economy was driven by private consumption. And there was follow-through over the course of the quarter from business investment, equipment investment up a staggering 70% on the quarter. So the production picked up as consumers began to spend.

I think the key here, though, is, as you mentioned, there's still a long way to go. And the question is how much momentum does the economy have coming out of the end of the quarter? So a very good number, but certainly, we have a long way to go.

BRIAN SOZZI: Michael, how much momentum does the economy have? I know you closely track Google Mobility data. What are you seeing right now as these COVID-19 infections are on the rise?

MICHAEL GAPEN: Well, I think if we looked at just the data, and here we have to kind of tease out what the September numbers are going to show. We don't have all of that picture yet. But if we looked just at the data, there's actually still a lot of momentum in the economy.

Yes, things are slowing. But that's to be expected. The goods sector rebounded quickly. It now has to come more from services.

We've all been expecting momentum in the economy to slow. But, that said, there's still pretty solid consumer spending out there. And manufacturing still has room to go.

Inventories actually fell, again, in the third quarter. They fell less than they did in the second quarter. So inventories added a lot. But it's a strange world of a smaller negative gives you a positive.

My point here is to say manufacturing is not-- the output from manufacturing is not even quite even with where-- where demand is. So there's a little more for production to pick up. So there's good momentum there.

Now, that gives us kind of upside as we head into the end of the year. But you're right. New COVID cases, the potential for restrictions on activity, the US is probably a few weeks behind Europe in that regard. So I think our expectation is that coronavirus cases will provide some headwind on activity as we get more into the fourth quarter. And

Increasing hospitalization rates and a higher death toll may lead to not lockdowns like we had last spring, but some restrictions on activity that provide a brake on momentum. So I don't think they've hit the economy yet. But there's an expectation that they might the further we get into the fourth quarter.

ALEXIS CHRISTOFOROUS: Michael, when you look at this number covering economic growth from July through September, during that time, we had a lot of government support-- a stimulus package, extended unemployment benefits. We don't now. What if we don't for weeks after the election? What is that going to do to fourth quarter GDP? And what are your forecasts for the whole year?

MICHAEL GAPEN: Well, at the moment. There's still a lot of-- [COUGHS] excuse me, I'm sorry. There's still a lot of accumulated saving on household balance sheets, maybe somewhere between $800 billion and $1.2 trillion in excess savings. So some of that government transfer payments are still kind of filtering through the system, even though the CARES Act benefits expired at the end of July.

The problem is that saving probably is not evenly distributed across household balance sheets. So, to your point, if we don't get further stimulus, further support for lost wage and salary income, it's likely that some households will deplete their savings, and therefore, momentum in spending will slow. We have the economy rising 2 and 1/2% at an annualized pace in the fourth quarter.

Again, if I just looked at the September data, we'd probably have some upside risk to that forecast. But if we look at COVID cases and the potential for saving to be depleted, then you have some downside risk to that. So I think that's the balance of where-- where we are at present.

You're correct to point out rising COVID cases, no stimulus. Could have a period of election-related uncertainty. Those are kind of downside risks. But there's just-- there's still a lot of momentum and a lot of saving on balance sheets. That's the potential upside risk.