By Harriet Torry 

The economy grew at a record pace in the third quarter -- increasing 7.4% over the prior quarter and at a 33.1% annual rate -- recovering about two-thirds of the ground it lost earlier in the coronavirus pandemic.

Gross domestic product -- the value of all goods and services produced across the economy -- jumped as pent-up consumer demand and government support helped power spending after disruptions related to Covid-19 eased. The increase in growth, the biggest jump in records dating to 1947, followed a record decline earlier in the pandemic when the virus disrupted business activity across the country.

That puts the economy about 3.5% smaller than at the end of last year, before the pandemic hit.

"Record gains aren't enough to get us out of the hole that Covid left us in," Diane Swonk, chief economist at Grant Thornton, said. She cited risks from a recent U.S. surge in infections as a potential economic headwind in the current fourth quarter, saying, "It's hard to reopen an economy unless workers and consumers feel safe and healthy."

The third-quarter GDP increase followed a 9% quarter-to-quarter decline in the second quarter, or a 31.4% annualized drop, adjusted for inflation and seasonal fluctuations. U.S. GDP is normally reported at an annual rate, or as if the quarter's pace of growth continued for a full year. But the pandemic triggered extreme swings in output -- a severe drop followed by a quick rebound -- making the annualized numbers misleading because no one expects second- or third-quarter numbers to continue for a full year.

The Commerce Department's GDP report provides the last major quantitative snapshot of the economy before Tuesday's presidential election. President Trump and Democratic presidential nominee Joe Biden offered contrasting views on what the growth figures mean in the final days of campaigning.

Recent data suggest improvement in the economy continued into the fourth quarter, though at a slower pace than the summer's resurgence.

The number of workers filing initial claims for unemployment insurance fell by 40,000 to 751,000 last week to the lowest level since the pandemic began, suggesting layoffs are easing despite a rise in coronavirus infections. The U.S. as of September has recovered about half of the 22 million jobs lost in March and April, at the beginning of the pandemic.

Forecasters predict the economy will expand more slowly through the fourth quarter as the temporary jolt from the economy's reopening and government stimulus fades, with unemployment expected to remain high this winter. They also project the economy will end 2020 smaller than a year earlier, but grow in 2021.

"There's a long way to go until the economy's healed," said James Knightley, an economist at ING Financial Markets LLC, citing the "squeeze on incomes coupled with anxiety about Covid coupled with election uncertainty."

The Wall Street Journal's October survey of economists found that more than half of respondents don't expect GDP will return to its pre-pandemic level until next year and that the economy will contract 3.6% this year, measured from the fourth quarter of 2019.

Economists say the path of recovery hinges on getting the pandemic under control. The U.S. and Europe both face fall increases in cases.

Business executives are cautious about the months ahead. "We certainly have seen some indications across the economy that across the nation and, frankly, the world that it could be a tough winter," Discover Financial Services chief financial officer John Greene said last week on an earnings call.

General Electric Co. Chief Executive Larry Culp on Wednesday said that while his company has generally stabilized, "We still acknowledge that the full duration, magnitude and pace of this pandemic across our end markets, operations and supply chain is uncertain."

Recent private-sector data show consumer spending remains below prior-year levels, led by weaker spending on in-person services such as travel, entertainment and restaurants. JPMorgan Chase & Co.'s tracker of credit and debit-card transactions showed that spending was down 5.1% from a year earlier in the week through Oct. 24.

Government support for businesses and households with stimulus checks, enhanced unemployment benefits and the Paycheck Protection Program helped power spending in the third quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic output, increased at a 40.7% annual rate in the third quarter.

Spending on long-lasting goods was particularly strong. The report showed the pace of consumer spending on durable items rose at a 82.2% rate during the quarter, a sign of increased purchases on big-ticket items such as vehicles and recreational goods. Spending on services that were hobbled earlier in the pandemic also rose sharply as people resumed health-care visits, dining out and some travel.

Consumers, especially those in higher-income households, bought furniture, autos, computers and home-exercise equipment as many worked and stayed close to home because of the pandemic.

The housing sector also has boomed, thanks to low mortgage rates and demand for larger living spaces. Residential fixed investment -- spending on home building and improvements -- increased at a 59.3% rate in the third quarter.

Business investment picked up in the third quarter. Nonresidential fixed investment -- which reflects business spending on software, research and development, equipment and structures -- rose at a 20.3% annual rate. Spending on equipment rose, although spending on structures, a category tied to the struggling oil and gas sector and commercial real estate, fell at a 14.6% annual rate.

Business has been thriving for Premium Service Brands, a home-services franchising company based in Charlottesville, Va., said Chief Executive Paul Flick. Third-quarter revenue is up 44% from a year earlier, following an initial drop in business in March and April when customers were reluctant to have work crews in their homes, he said.

"Overall people are saving money, taking those savings and reinvesting it into their home. They're not going to restaurants and not traveling," Mr. Flick said.

Christopher Boone, an automotive-industry data analyst in Westfield, Ind., said that "right now my spending is somewhat wary, just because of uncertainty in markets" related to the pandemic and election.

He and his wife, Nancy, recently bought a car and plan to travel to Florida this winter. He expects the pandemic's impact on his future spending "will be collateral effects," such as the availability of products. "Disruptions in supply chains are going to create shortages in the Christmas season, I'm positive of that," he said. "I think things are just going to be hard to get."

Meanwhile, restaurants have faced continued weak demand and capacity constraints due to the coronavirus pandemic. Glenn Lunde, chief executive of San Jose, Calif.-based Togo's Eateries LLC, which operates and franchises a chain of 183 sandwich restaurants, said the past few months have been "quite an adventure."

Sales were down 26% year-over-year in the second quarter and down 8% in the third quarter. In September, sales fell 6% from the prior year. "I think everyone's concerned about cases going up, where's the virus going to go, no one really knows. The election, stimulus, there's a lot of uncertainty given all these unknowns," Mr. Lunde said.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

October 29, 2020 13:50 ET (17:50 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.