JP Morgan Chief U.S. Economist Michael Feroli joins Yahoo Finance’s Zack Guzman to break down the third quarter GDP report.

Video Transcript

ZACK GUZMAN: First up, just your reaction to what you saw from that number and what it indicates about the current recovery.

MICHAEL FEROLI: Well, I think you kind of previewed it, which is that it wasn't really a big surprise, at least coming into this number, because over the course of the last few months, we had been seeing those monthly numbers on things like retail sales edged our expectations higher. So it is consistent probably with what we had anticipated-- we and other economists had anticipated.

It obviously leaves the economy still short of where it was at the end of last year. We're still about 3 and 1/2% lower in terms of GDP in the third quarter relative to the fourth quarter of last year. But it is-- you know, it's good progress. You can't expect this kind of number ever again, or at least, anytime soon. You can only reopen the economy once if it's already mostly open.

And, you know, I don't think it tells us, unfortunately, all that much about the question everyone wants to know, which is what happens next. Because as you-- you know, because if you still are running below capacity and the unemployment rate is still pretty elevated, you want to sustain pretty strong growth. This doesn't really give us any hints about how the economy will respond as we kind of watch all these virus case counts move higher.

ZACK GUZMAN: Yeah, and I mean, when we think about trying to forecast Q4 and beyond, if this print doesn't give you much insight there, perhaps the initial unemployment claims we just covered might, too. I mean, 751,000 still above where we saw the numbers come in back in the Great Recession there.

And obviously, the shape of the consumer is still the focus here since that was driving the strength in Q3. As you noted, it's still a long way to go. We still have about a million-- sorry, 11 million fewer workers on payrolls than before the pandemic hit here. So what is the strength of the consumer say to you right now about the strength of the recovery moving past Q4 and into 2021?

MICHAEL FEROLI: Right, so the consumer really led the growth we saw in the third quarter. And there's good reason to believe that at the start of the fourth quarter, the consumer is also probably in pretty good shape. It looks like credit card spending, which we see at a daily frequency, has been continue to pick up this month. And that's been helped, of course, by the Amazon Prime Day.

We suspect next week, we'll see that October auto sales move higher. So through the first month of the fourth quarter, looking pretty good. And then as we get into the holiday season, I think there are a lot of questions as to whether the interaction of not only the virus but the virus and the cold weather and the holiday season.

And generally, we expect a big bump in all sorts of consumer spending in November and December. And that's obviously being jeopardized here by what we're seeing in the public health realm. I think in terms of when we look beyond to next year, which is, I guess, what you asked about, I think it's going to depend quite a bit on the fiscal situation, right?

So we did see in today's number that income, personal income, continues to receive enormous support from the federal government and in the third quarter, which obviously helped that big gain in consumption.

But a lot of that income is going to-- income support is absent in the fourth quarter of this year, which should be fine because there is enough saving, enough of a cash buffer on the part of households, that even with a shortfall of 11 million jobs overall, aggregate consumer spending should hold up in the fourth quarter. But if we don't see any support going into next year, then I think that does raise bigger concerns about the viability of the consumption recovery in the first half of next year.

ZACK GUZMAN: Yeah, and you saying that you expect spending to hold up in the fourth quarter, obviously, as you highlighted there, the holiday season very important in terms of consumption and how much the consumer is going to actually go out and spend there.

But there have been, I guess, rising concerns that some of the questions on that cash buffer remain, particularly when it comes to, you know-- we haven't necessarily seen this in the numbers play out yet, but it could be masked by maybe rent getting pushed out or forgiven in the short period. Of course, we have seen the deadline here get pushed back in terms of taking off a lot of the protections from evictions.

But even Moody's chief economist Mark Zandi was flagging some of these risks in the fourth quarter and what could happen just after we get those things lifted. Because he says households are going to have to make some very interesting financial choices then in terms of spending and cutbacks around the holidays to maybe make rent. And that will be an additional thing to consider here in terms of the strength of the consumer.

So are you seeing anything on that front? I know you're saying, look, you expect things to hold up here. But maybe the downside risk, the percentage chance tied to that, are you seeing that grow?

MICHAEL FEROLI: So in terms of what we're actually seeing in the data, so far things look fine. But then that doesn't-- what we're seeing happen now doesn't obviously tell us what happens in the future. And I do think, you know, the middle three months of the winter-- well, at least, November, December, January are the period of maximum risk.

I think regardless of the election outcome, it seems like there's a good chance we could get at least another stimulus check or increased generosity of unemployment benefits after the election, in which case, you know, you get past to late January, and you kind of get another lifeline. But I think, you know, we may have this air pocket where-- you know, where I think the consumption recovery looks most the most fragil to us.

ZACK GUZMAN: Yeah, and I mean, obviously, a lot of people are expecting, since we're so close to the election, obviously, a deal is not coming until after we get those results. But even on that front, there are still fears that the results might take a while.

So when we think about the short term here and you talk about the air pocket over the next few weeks, maybe a month, in terms of waiting for that stimulus check, what are the short term consequences when you look at the threat right now facing the economy in the short term of where most stresses are building up right now?

MICHAEL FEROLI: Yeah, so economic theory would say that policy uncertainty, or uncertainty more generally, tends to hold up decisions. So people may defer particularly big ticket purchases, whether it's buying a house, a car, or businesses investing in capital projects. So that's what theory would say.

Normally, we would like to take theory and match it against history. Unfortunately, I think the closest historical comparison might be something like the contested election of 1876. And of course, we don't have monthly economic data for 1876 or 1877 to really guide us. But at least in theory, that's the concern, is that if we have a period of prolonged uncertainty, people will hold off on big purchases until after that uncertainty is resolved.