MNI INTERVIEW: GDP Won’t Recover 1Y From Now- Chicago Fed Econ

U.S. GDP growth will fade after the third quarter and keep the economy from returning to its pre-pandemic level of output a year from now, Chicago Fed senior economist Scott Brave told MNI.

The economy grew at a 30.8% annualized pace between July and September and the fourth quarter will come in at 5.2%, according to a new near-term projection model Brave created using 107 indicators. GDP fell at a record 31.4% pace in the second quarter and official third quarter figures come out Oct. 29.

Near-term growth has been boosted by positive surprises in job and consumer spending, Brave said in an interview.

"There is a bit of recovery bounce-back under way certainly, and the Q3 number is expected to be fairly strong," he said.

But growth will slow to a 0.6% annualized pace in the first quarter of next year, followed by gains of 3.1% and 2.3%, according to Brave's model, known as "ALEX". This "would not be sufficient to return real GDP to its pre-pandemic levels," according to a paper published Friday. The model projects output in Q3 of next year will be 1.3% below where it was at the end of last year before the pandemic took hold, he said in a follow-up email.

NEARCASTING PATH

The model's strength is near-term projections based on an assumption of mean reversion after a shock, he said. "It's kind of been developed to be more like a nearcast, it's very much used to tell you the sense of what the near-term path of GDP is."

ALEX also indicates that an upside scenario with GDP returning to normal would be more probable than a resumed plunge in output.

Overall the results are broadly in line with similar models done at the Atlanta and New York Feds, and a monthly Blue Chip survey, he said.

The findings carry more uncertainty because historical data has little precedent for the pandemic, and because ALEX is geared to assume shocks in one quarter don't carry over into the next.

"In normal times that's a pretty good assumption," he said. Today "it may not be the best one."