This year was full of challenges, even for the biggest economies in the world. Hopefully, the U.S. economy grew at a record pace in the third quarter, fueled by more than $3 trillion in pandemic relief. However, the situation remains quite complicated, as it appears to have lost momentum as the year comes to an end amid raging new Covid-19 cases as well as dwindling fiscal stimulus.
It is worth noting that, gross domestic product (GDP) rebounded at a 33.4% annualized rate in the third quarter, the Commerce Department said in its third estimate of GDP. Interestingly, that was revised slightly up from the 33.1% pace reported in November.
As a reminder, it followed a 31.4% rate of contraction in the April-June quarter. It was the worst result since the government started keeping records in 1947. People should take into account that, the U.S. economy remains 3.5% below its level at the end of 2019.
U.S. Economy and risk factors
The country is struggling with a resurgence in coronavirus cases, with more than 18 million cases. Importantly, state and local governments have reintroduced restrictions on businesses, reducing consumer spending as well as causing a fresh wave of layoffs.
It took a lot of time for lawmakers to reach an agreement. Hopefully, on Monday, Congress approved a rescue package worth almost $900 billion. Thanks to this package, millions of Americans will receive direct payments. Moreover, it will expand a small-business lending program as well as steer money to schools, transit systems, and vaccine distribution.
Hopefully, the additional stimulus will provide some relief, it won’t be enough to solve all problems. As a reminder, the package excluded aid for state and local governments. Unfortunately, the pandemic affected their budgets.
Countries including the U.S. started to vaccinate the local population, but it could take a while to reach herd immunity.
Importantly, consumer spending accounts for more than two-thirds of U.S. economic activity, which led to a broad recovery last quarter. However, consumption appears to have since cooled, with retail sales declining in October and November. It makes sense as household incomes came under pressure amid the expiration of a government-funded weekly unemployment subsidy.
It is worth mentioning that, first-time applications for weekly unemployment benefits are at a three-month high. Interestingly, most economists expect modest growth or even a contraction in the first three months of 2021. Biden administration should work with lawmakers to provide additional funds in the nearest future.