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Economic Forecasts

Recovery Has Begun, but Progress May Slow

Kiplinger’s latest forecast for the GDP growth rate

The recovery has started. Third-quarter GDP should rise 18% or so at an annual rate. But a sustained rebound will depend on continued progress against the novel coronavirus. Fortunately, infection rates appear to be declining in states that had experienced a summer surge, and previous progress in Northeastern and Midwestern states appears to be holding for now. However, there is the uncertainty of whether and when Congress will pass another economic stimulus bill, plus the drag from reductions in extra unemployment benefits and from businesses using up their PPP loan funds. Finally, the fact that initial unemployment claims are holding stubbornly above 1 million each week is an indication that future consumer spending may suffer if the labor market doesn’t improve.

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It will likely be 2022 before the economy returns to its level at the end of 2019. Expect 2020 GDP to decline 4.9%, with a 3.8% rise in 2021.

GDP in the second quarter dropped 31.7% at an annual rate, slightly better than first reported. Consumer spending slumped by 34.1%, with the biggest declines in services, gasoline and clothing. However, spending on recreational goods and motor vehicles rose, as stimulus checks provided households with enough spare cash for fun items or a down payment on a car, SUV or pickup truck.

In fact, consumer disposable income rose 9.6% (non-annualized), even though total wages and salaries dropped 7.1%. Proprietor income was hit the hardest, falling 11.6%. Consumers hedged against the economic uncertainty by saving 26% of their income, a big leap from the 9.6% rate in the first quarter.

Business investment fell 28.9%, as businesses cut back their spending on equipment, buildings and inventories. The trade balance improved a small amount. Even though exports dropped 63.2% and imports fell “only” 54%, the overall trade balance improved because imports are so much bigger than exports.

Federal government spending supported the rest of the economy in the second quarter, rising 17.6%. State and local government spending declined 5.5%.

Source: Department of Commerce: GDP Data

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