Third quarter registers a 33% gain, but output is still below levels seen late last year.

By Manuel Guitierrez, Consulting Economist to NKBA

As expected, the nation’s economy rebounded once restrictions began to be  lifted or eased. The GDP (Gross Domestic Product), which attempts to measure the value of the economy’s output, rose by 33.1% in the third quarter.

This is a remarkably strong gain, which recovered a large portion of the year’s first half loss. The third-quarter spike brought total U.S. output to $18.6 trillion which, as seen in the chart above, is still short of the $19.3 trillion peak reached in the fourth quarter of last year. In fact, current levels are only back to levels that were seen in Q2 of 2018, which came in at $18.7 trillion.

Consumption comprises the biggest component of GDP, typically accounting for about two-thirds of the total. The 33% bounce in the third quarter is the result of consumption rising at a faster 41%, bringing its total contribution for the quarter to 70%. That translates into 7 of 10 dollars of output in the third quarter coming from consumer spending.

Business Investment, a critical component in the economy, since it boosts productivity and well-being of the future economy — rose, but at a more modest 20%. Like other GDP components, despite the third-quarter gain, business investment is back at levels from the first quarter of 2018, two-and-a-half years ago.

Foreign trade also rebounded, with imports and exports each showing significant third-quarter growth. The U.S. trade position worsened, though, since imports rose  91% — much faster than the 60% for exports. In pure dollar terms,  imports of $3.2 trillion in the third quarter were almost 50% higher than exports.

Total consumption spending reached $12.9 trillion in the third quarter. The vast majority of consumer spending was on services, accounting for 61% of consumption spending, or $7.9 trillion.

Spending for goods in the third quarter amounted to $5.1 trillion. Most of the goods spending were for Nondurables, which captured almost one-quarter (24%) of total consumer spending, or $3.1 trillion. Durable goods generated $2 trillion for the quarter.

So where are consumers spending their money? A large portion of it is typically spent on Health Care, and was no different for this report, as $2.38 trillion was spent in the third quarter, about 3% less than the year before.

The largest line item item is Housing & Utilities, which includes rental expenses, new housing construction, remodeling, utility costs, as well as the imputed costs to consumers for their own homes. In the third quarter, consumers spent $2.81 trillion on housing. As seen in the chart below, it represents just under 1 in 5 consumer dollars.  Housing expenditures rose 4% over the previous year.

The red bars, which represent categories where consumers spent less in Q3 than last year, are those areas that have been impacted most severely by the pandemic shutdown. Consumers are driving and traveling less, so Transportation, Gasoline & Energy and Eating Out/Hospitality spending are all off for the year.

At the same time, spending for Housing & Utilities, Food & Beverages and Home Furnishings are amoing the categories for which additional time at home has lead to greater consumer spending.

It’s important to note that consumer spending data discussed here is different from retail sales data released by the Commerce Department on a monthly basis. The retail sales data is classified by type of store where sales take place. For instance, the classification of Food & Beverages retail sales covers sales at restaurants and bars selling directly to consumers, which over the last 12  months totaled $832 billion.

But Food & Beverages under the umbrella of consumer spending includes items purchased in any type of outlet, including supermarkets or those delivered to the home. According to GDP data, this spending ran at a $1.14 trillion rate, more than $300 billion above retail sales data.