GDP jumped 33%, but how about that output gap?

Nancy Marshall-Genzer Oct 29, 2020
Heard on: Marketplace
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Cargo containers are stacked on a ship docked at the Port of Oakland in California. Economic output in the United States hasn't caught up yet to pre-pandemic levels. Justin Sullivan/Getty Images

GDP jumped 33%, but how about that output gap?

Nancy Marshall-Genzer Oct 29, 2020
Cargo containers are stacked on a ship docked at the Port of Oakland in California. Economic output in the United States hasn't caught up yet to pre-pandemic levels. Justin Sullivan/Getty Images
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The U.S economy grew at an annual rate of around 33% in the third quarter, the U.S. Department of Commerce reported Thursday.

That data from the federal government sounds great, but remember that gain follows a huge plunge in economic growth during the second quarter.

Thursday’s number, no matter how great it looks, doesn’t get economic output back to where it was before the pandemic. In fact, we’ve got a big output gap.

We’ve all been there. Sometimes, we just don’t live up to our potential.

Former Fed economist Claudia Sahm said it’s kind of like what happened in her house this morning, when her fifth grade son had to retake a virtual math test.

The teacher knew what his potential was, but “because he wanted to get done with school and play on his iPad, he didn’t put in the time and do his best work.”

Sahm said it’s the same with the economy. The output gap is the difference between what the economy is actually doing versus what it could do before COVID-19.

In recent years, gross domestic product has been growing at a rate of around 2% or more.

“It just means that we know what we could be, and if we’re not there yet, well then, we’ve got to do better,” she said. 

Even with Thursday’s strong GDP number, we’ve only made up about 60% of the economic ground we lost in the first half of this year, according to Nationwide senior economist Ben Ayers. He said that’s partly because consumers are still avoiding risk.

“You know, consumers are still down about a third from what they normally spend, overall. Certainly most of that’s focused on the service sector — people not eating out as much. Music concerts — anything that would involve large groups,” he said.

The solution here is pretty simple: less virus and another economic relief bill from Congress.

Greg Daco, chief U.S. economist at Oxford Economics, said a lot of consumers relied on extra federal unemployment payments that ended over the summer.

“As these transfers have slowly faded out, consumer spending activity has also cooled,” he said, adding that it’ll be at least another year before we get back to a normal rate of economic growth. 

Without another relief package, Daco said it’ll take even longer.

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