The rising number of U.S. households with burdensome student debt calls for a federal response [feedly]

The rising number of U.S. households with burdensome student debt calls for a federal response
https://equitablegrowth.org/the-rising-number-of-u-s-households-with-burdensome-student-debt-calls-for-a-federal-response/

Overview

Today, about 43 million adults in the United States collectively hold $1.5 trillion in federal student loan debt and an additional $119 billion in private student loans not backed by the federal government. Student loan debt is an issue for many U.S. households, but it is becoming an especially acute problem for heads of households who are low-income, Black, or Hispanic. The Federal Reserve's 2019 Survey of Consumer Finances shows that student debt-to-income ratios are rising, saddling millions of U.S. households with a persistent drag on their incomes that could last 20 years.

The new data show that student debt-to-income ratios crept up over the past two decades and now average 0.56 among adults who have any student debt. In this issue brief, we report mean (average) income divided by mean (average) debt to reduce the influence of large outliers and look at people between the ages of 25 and 40 to roughly capture the generation that has been most affected by climbing college costs while excluding those who are just starting out their careers and therefore have especially low incomes. Excluding older households also addresses, in part, known weaknesses of using SCF data to analyze student debt. Although we think this age restriction is a reasonable frame for analyzing the data, removing it or using different age brackets does not substantially change the results we give here.

The rising number of U.S. households with burdensome student debt calls for a federal responseDownload

Our analysis demonstrates that the student debt burden in the United States falls most heavily on those U.S. households in the bottom 50 percent of the income distribution—and even more on Black American households. Measures to alleviate these student debt burdens—via income-based repayment plans and one-time forbearance policies enacted by Congress amid the coronavirus recession—mitigate these burdens only on the margins. We detail these findings from the new 2019 Survey of Consumer Finances and conclude with some analysis of student debt forgiveness programs based in these data.

Student debt burdens are on the rise

Disaggregating households by their income, the data show that adults in the bottom 50 percent of the income distribution with any debt have an average debt-to-income ratio of 1.03—more than double the ratio of 0.5 that same group held in 2001. Debt ratios are also rising for those in the next 40 percent of individuals by income, indicating that student debt is a problem of growing significance for a broad swathe of working- and middle-class households. Notably, these trends are for households that hold student debt and have therefore attended some college, so the trend is not being driven by increased college attendance. (See Figure 1.)

Figure 1

Heightened levels of student debt are often downplayed. Analysts point out that many of the largest balances are accrued by doctors and lawyers who will find high-paying jobs and have no trouble paying down their debt. But there are a large number of workers with relatively low balances on the student debt they owe who are nonetheless struggling to pay because they are stuck in low-income jobs. In fact, about 500,000 U.S. households with heads between the ages of 25 and 40 in the bottom 50 percent of the income distribution have a debt ratio greater than 1, and 2.5 million have a debt-to-income ratio greater than 0.5. Twenty percent of all households in this age group in the bottom half of the income distribution have a debt-to-income ratio of 0.5 or greater, not just those who have any student debt. (See Figure 2.)

Figure 2

Black borrowers are struggling most

Because the U.S. labor market continues to discriminate against Black Americans, the result is Black student debtholders are likely to have lower-paying jobs than their White peers. Black student loan borrowers also have less family wealth to draw on to pay for college, leaving them with higher debt balances too. The result is that nearly 30 percent of Black Americans between the ages of 25 and 40 have a student debt-to-income ratio exceeding 0.5. Latinx student loan borrowers are less likely to have high debt, although this is in part because they are less likely to have attended college than other groups. (See Figure 3.)

Figure 3

A contributing factor to these trends is that more Black Americans are now attending college. But if we confine our analysis to only those who have attended at least some college, the results are very much the same. In 2001, about 5.5 percent of Black Americans who attended at least some college had a debt-to-income ratio greater than 1. In 2019, it was a whopping 24 percent.

Other data points echo our findings here. Analysis by the Institute for College Access and Success based on voluntary reporting by colleges found that Black recent graduates have the highest difficulty (about 40 percent of Black respondents) making federal student loan payments 12 months after graduation. Racial wealth divides between Black and White households mean that Black college graduates may not have a secure financial safety net in the event of financial crises, such as the one our nation is experiencing currently.

Institutional racism and discriminatory financial practices up until the 1970s suppressed the growth of household wealth among non-White families, with long-lasting implications for today's non-White millennial and zoomer students. Today, without the same financial cushion of generational wealth that is available to average White households, college graduates in Black and Latinx households may run the risk of defaulting on their student debt when the U.S. economy faces shocks, such as amid the current coronavirus recession and future economic downturns.

Policy implications

U.S. policymakers should be concerned by these trends. Income-based repayment plans enable some of these student loan borrowers to manage the repayment burden month to month. And many of these borrowers will be able to get forbearance from the U.S. Department of Education so they can pay $0 during periods where they are unemployed or have suffered serious declines in income. But even modest payment amounts (income-driven repayment plans cap out at 10 percent of discretionary income) are a drag on the ability of these individuals to buy houses, start families, become entrepreneurs, and engage in other activities that previous generations took for granted.

This drag, no matter how modest, was not faced by previous generations of college graduates and their families. Student debt will continue to weigh on the balance sheets of these households for 20 years in most cases. And although the overall ratio of debt payment-to-income has not increased in the way the ratio of debt balances-to-income have, this reflects, in part, the fact that debt has actually become more burdensome, and many students are in forbearance or are more likely to use income-based repayment than in the past.

One-time student debt forgiveness, proposed by both policymakers and academics, is one way to reverse the trends discussed above. As economist Darrick Hamilton at The New School and social scientist Naomi Zewde at the City University of New York's Hunter College argued earlier this year, full forgiveness of all existing student debt would significantly reduce the Black-White wealth gap, because Black households face higher balances and are far more likely to struggle to pay those balances back. It also has the significant advantage of being relatively simple to carry out, at least relative to proposals that include complicated eligibility requirements. These kinds of requirements have been problematic in the past. The Public Service Loan Forgiveness program, for example, approved only 3,400 out of 200,000 applicants for forgiveness in 2017, because the requirements proved complicated, and borrowers did not fully understand the program.

Other proposals have focused on forgiving a flat, across-the-board sum. Sen. Elizabeth Warren (D-MA), in her 2020 presidential campaign, for example, proposed eliminating $50,000 of debt. This would dramatically reduce the number of households with high student debt-to-income ratios. (See Figure 4.)

Figure 4

One-time debt forgiveness of any sort, however, is not a sufficient solution to the broader problem of increasing college costs. To prevent a recurrence of the creeping debt situation happening now, a college education needs to be made affordable for lower- and middle-class households. As demand for college has risen, per-student funding provided by states to public universities has fallen. Whereas tuition once accounted for just a bit more than 20 percent of revenue at public institutions, in 2017, it accounted for almost half of all revenue. Cuts in state budgets as a result of the Great Recession also exacerbated the issue, with some states still funding far less than they did before the crisis. States likely do not have the ability to reverse this trend themselves. To make college affordable, the federal government will have to step in and jointly fund public institutions with states.

As of fiscal year 2017, ending in September 2017, only 2 percent of the federal budget was allocated toward higher education. Since 2007, there has been no growth in federal and state education expenditures. In order to curb rising student loan debt, policymakers at both the state and federal level should invest in affordable and accessible higher education, especially 2- and 4-year programs. Prioritizing need-based student financial aid over merit-based aid benefits students who grow up in communities with poorly funded public Kindergarten through 12th grade education, allowing these students to experience economic mobility without the heavy burden of student loan debt after graduation. The Debt-Free College Act is an example of one bill that would implement some of these recommendations.

Much of the analysis of student loan debt fails to acknowledge that even when the burden of student loans is modest, it is a drag on income that previous generations did not face. The creeping increase in student debt-to-income ratios is evidence that the problem should be tackled now, before the student financial aid system becomes more dysfunctional. Federal support would ensure that no one is unable to get a college education due to their parents' financial circumstances, and that the nation continues to build a well-educated workforce.

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CBPP: Court Decision Against Trump Rule Preserves SNAP for 700,000 Jobless [feedly]

CBPP: Court Decision Against Trump Rule Preserves SNAP for 700,000 Jobless
https://www.cbpp.org/blog/court-decision-against-trump-rule-preserves-snap-for-700000-jobless

Sunday's federal court decision striking down a Trump Administration rule that would have eliminated SNAP (food stamps) for 700,000 low-income jobless workers means that the punitive, ill-conceived rule — already temporarily suspended due to the pandemic — can't take effect even when the public health emergency ends.

Cutting people off SNAP would have been especially harsh and short-sighted during the pandemic, given high unemployment and widespread food insecurity. As the court noted, "Despite the [Agriculture Department's] blinkered effort to downplay or disregard the predicted outcomes of the Final Rule, the backdrop of the pandemic has provided, in stark relief, its procedural and substantive flaws." The Administration has been "icily silent" about how many people would have lost benefits if the rule were in effect during the pandemic, the court wrote.

But the rule would have been flawed even without the pandemic. Along with faulting the Administration for not following its own rulemaking process, the court dismissed Administration claims that before the pandemic, too many unemployed adults were getting SNAP under long-standing policy.

At issue is a decades-old law limiting adults who aren't raising minor children in their home to only three months of SNAP benefits when they aren't working or in a training program for at least 20 hours per week. The law includes a safety valve for areas where there simply aren't enough jobs for this population: states can request waivers of the three-month limit so people looking for stable work can continue to eat. Virtually every state has used this flexibility at some point.

The Trump Administration sought to drastically reduce state flexibility beyond what the law allows, without providing any data or explanation for why that's necessary.

The 700,000 or more unemployed and underemployed workers who were at risk are among the poorest participants in SNAP, with incomes averaging only $187 per month. The Administration claimed that taking away their food assistance would spur them to find jobs, but the evidence didn't support this rhetoric before the pandemic and certainly doesn't support it now.

As we've explained, most SNAP participants, including those subject to the three-month limit, work when they can and rely on SNAP during periods of unemployment or to supplement low wages. The massive job losses over the last seven months have disproportionately harmed low-wage workers, who already face greater barriers to work than the average job seeker, such as less education and lack of transportation.

The court's decision reflects concerns that over 100,000 community groups, local leaders, and individuals raised in public comments on the rule since the Administration proposed it over a year ago. Events since then have shown how essential SNAP is in ensuring access to food for those who can't find work.

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CBPP:ACA Repeal Lawsuit Threatens Medicaid Expansion Coverage for Millions [feedly]

ACA Repeal Lawsuit Threatens Medicaid Expansion Coverage for Millions
https://www.cbpp.org/blog/aca-repeal-lawsuit-threatens-medicaid-expansion-coverage-for-millions

Aviva Aron-Dine

If the Trump Administration and a group of 18 states convince the Supreme Court to strike down the Affordable Care Act (ACA), its Medicaid expansion — which covers more than 12 million low-income adults across the country — would end along with the rest of the law. That would take health coverage away from millions, reduce access to care, increase premature deaths, and increase medical debt and uncompensated care costs, research shows. It would also exacerbate racial disparities in coverage and access to care, and it would harm children along with adults.

Oral arguments before the Court are scheduled for November 10. The lawsuit, which 18 state attorneys general filed and the Administration later joined, argues that an incidental effect of the 2017 tax law was to repeal the entire ACA — specifically, that when policymakers eliminated the ACA's tax penalty for not having insurance, the change made the entire ACA unconstitutional. While legal experts almost uniformly dismiss that argument as absurd, the case has made its way to the Supreme Court, raising a real risk that the Court could overturn the law.

The ACA's Medicaid expansion lets states cover adults with incomes up to 138 percent of the poverty line (about $17,600 a year for a single adult), with the federal government paying 90 percent of the cost (well above the regular federal matching rate for Medicaid) and the states paying the rest. Before the ACA, the typical state covered parents only if their incomes were below about two-thirds of the poverty line, and most states didn't cover non-elderly adults without children no matter how poor they were. If the ACA's enhanced federal funding disappeared, it's hard to imagine that states would provide meaningfully more generous coverage today than they did before the ACA — especially if the Court strikes down the law amidst an economic downturn that has fueled a major state budget crisis.

Twelve million people had Medicaid expansion coverage as of mid-2019, and the figure likely is significantly higher now due to the economic downturn: expansion enrollment rose almost 13 percent between February and July in states with available data, equivalent to 1.5 million people nationwide. The overwhelming majority of them would likely become uninsured if the Court strikes down the ACA. Overturning the ACA would also prevent the remaining 14 states that have not yet implemented the expansion from doing so, which could extend Medicaid coverage to over 6 million more people.

A large and growing body of research shows that coverage losses from ending expansion would cause severe harm, including:

• Less access to care. Expansion has increased the share of low-income adults getting primary care, preventive care, mental health care, and treatment for substance use disorders, studies show. It's been especially important for the large share of expansion enrollees with significant pre-existing conditions, who have seen large increases in access to regular care and in prescriptions filled for conditions such as heart disease, diabetes, and depression.
• More premature deaths. Medicaid expansion saved the lives of at least 19,200 older low-income adults from 2014 to 2017 in states that adopted it, while state decisions not to expand cost the lives of 15,600, according to a careful study by researchers at the University of Michigan, National Institutes of Health, Census Bureau, and UCLA. (Hover on the map below for state-by-state estimates.) Expansion was especially important in preventing premature deaths due to conditions responsive to medical care, such as cardiovascular disease and diabetes.
• More financial insecurity. Studies have found that expansion reduces medical debt, improves households' access to credit, and reduces evictions, with one study finding that evictions fell about 20 percent in expansion compared to non-expansion states. Ending expansion would likely reverse these improvements. The effects would be especially devastating when millions of people are struggling to afford food, rent, and other necessities due to the economic downturn.
• More uncompensated care. By increasing the number of uninsured, ending expansion would also increase hospitals' uncompensated care costs. Those costs fell by 45 percent as a share of hospital budgets in expansion states between 2013 and 2017, compared to 2 percent in non-expansion states, recent data show.

Medicaid expansion has been particularly important in expanding coverage for Black and Hispanic people and American Indians/Alaska Natives, so eliminating it would disproportionately harm those groups. Gaps in access to care have shrunk along with gaps in coverage, and preliminary evidence suggests that expansion has narrowed disparities in health outcomes as well, while improving outcomes for all racial and ethnic groups. For example, a 2018 JAMA study finds big reductions in the share of residents who died from kidney failure in expansion compared to non-expansion states, with larger improvements for Black people (who are at higher risk for kidney failure).

And while ending expansion would directly harm adults, it also would indirectly harm children. Expansion has reduced uninsured rates and increased access to care for new mothers, research shows, almost certainly benefiting their children as well. And a recent study, based on another randomized trial, adds to the large body of evidence that Medicaid-eligible children are likelier to gain coverage when their parents become eligible.

The children's uninsured rate has risen over the past few years, with over 700,000 more children uninsured than in 2016. Ending expansion would be another major setback, undermining children's access to care and long-term well-being.

Map

Table

Lives Saved, and Lost, Due to States' Medicaid Expansion Decisions, Adults Aged 55-64

Expansion state

Non-expansion state

Early expansion state excluded from the analysis

State is party to lawsuit challenging ACA

Source: CBPP calculations based on Miller et al. supplemental estimates.

CENTER ON BUDGET AND POLICY PRIORITIES | CBPP.ORG

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Kate Bahn, Equitable Growth: Labor in the Boardroom: A Model for the United States? [feedly]

Good discussion of boardroom representation by labor' impact on bargaining power.

Labor in the Boardroom: A Model for the United States?
https://equitablegrowth.org/labor-in-the-boardroom-a-model-for-the-united-states/

by Kate Bahn

Under U.S. law, corporate boards of directors represent the interests of companies' shareholders. This is reflected in the typical composition of boards, composed almost entirely of people from the business world, with some from the nonprofit sector and other elements of the private sector mixed in. Because boards of directors oversee the management of companies, they have fiduciary responsibilities to look at corporate strategy, hiring, and other decision-making through the lens of how these corporate activities affect the interests of the corporation, which, in recent decades, generally means the shareholders.

One group that boards do not look out for are the workers whose labor creates value for companies. Workers matter to boards only as they affect shareholder interests. That is not to say that boards don't care at all about the health, safety, and well-being of workers. For one thing, they are obliged to follow the state and federal laws affecting workers. But generally, their interest in workers—how many there are, what they are paid, how they are treated—is confined to how such decisions affect shareholder interests, such as stock prices and fulfilling firms' legal responsibility for workplace protections and rights.

It does not have to be this way. Building an economy with broadly shared growth can include corporate policy that considers a broader range of interests, including the voices of the workers, who make companies operate day-to-day, in decisions about both short- and long-term priorities. It's possible that federal law can be changed, as it has been in more than a dozen European countries, to require corporate boards to represent the interests of workers, as well as shareholders.

How would this affect companies and workers? New research on Germany, funded by the Washington Center for Equitable Growth, by grantees Simon Jäger of the Massachusetts Institute of Technology and Benjamin Schoefer of the University of California, Berkeley, along with Jörg Heining of the German Institute for Employment Research, seeks to answer these questions. The co-authors examine how changes to so-called co-determination laws (corporate governance speak for worker participation at the board level) affected employment and earnings. Despite predictions by business interests that giving workers more voice may run contrary to sustainable corporate strategy, the three researchers find that companies with co-determination perform well, do not have any significant changes to wage levels, and are less likely to outsource business functions.

Policies such as co-determination are increasingly relevant to the United States, where wages have remained essentially stagnant for decades, despite a long-term increase in productivity, which suggests that workers are creating value but are not reaping any of its benefits. As the U.S. labor market becomes increasingly fissured, with rising domestic outsourcing over time, workers find fewer opportunities for advancement, and declining unionization rates decrease workers' voices. Furthermore, wage stagnation was largely resistant to more than a decade of economic recovery and a historic drop in unemployment until the recent coronavirus recession.

As U.S. policymakers consider how to address this problem, serious thought is being given to how corporate structures might be changed to take workers' interests into greater account—on the assumption that this could help workers get a larger share of the corporate pie. Clean Slate for Worker Power, a project of Harvard Law School's Labor and Worklife Program, is advancing an agenda of U.S. labor law reforms designed to restore worker power, including requiring worker representation on corporate boards. And legislation is before Congress to establish such a requirement.

To help policymakers understand these proposals, it would be helpful to know what effect such reforms might have on wages and employment, as well as investment and capital stock, corporate profits, and the long-term success of individual businesses. Research by Jäger, Schoefer, and Heining begins to answer these questions.

It might be difficult for people in our nation to think of corporate boards representing anybody but shareholders since this is part of American corporate culture and precedent going back to the 1970s. In fact, boards are very different in some countries. A case in point is Germany, where, for nearly 70 years, the law required workers to be represented on some corporate boards. While that mandate existed in some form going back to 1951, it was abruptly abolished in 1994 for new firms. But the mandate remained, and remains, for firms that existed before that date.

This sudden change in German law created a so-called quasi-experiment that allowed Jäger, Schoefer, and Heining to examine how labor representation in corporate governance affects workers and companies. Operating side-by-side in Germany are companies still under the mandate and companies free of it. This raises numerous questions. How do they compare? Does having workers on the board result in higher wages? Lower capital stock? Reduced profits? More bankruptcies? That is what conventional economic theory might suggest. The researchers' working paper, "Labor in the Boardroom," examines these questions, with some very interesting conclusions.

First, some background. Like many other European countries, Germany has a two-tier board system, a supervisory board and an executive board. The executive board is equivalent to the senior management of a U.S. company, with day-to-day operational responsibilities. The supervisory board operates much like U.S. boards of directors, with responsibility for the selection, monitoring, auditing, compensation structuring, and dismissal of the executive board. It is involved in strategic planning, large financial decisions, and other fundamental decisions about the company.

Between 1951 and 1976, Germany passed a series of laws that mandated supervisory boards of companies—other than privately held firms or limited liability corporations—be made up of varying levels of workers' representatives, depending on the size and type of company. By 1976, the largest corporations and smaller companies in the mining, coal, and steel industries were required to have workers' representatives comprising one-half of their supervisory board membership. Other companies had one-third worker representation. Workers elected their own representatives, who were always workers, except in the largest companies, where workers were permitted to elect outsiders to supplement workers.

In the United States, one might expect co-determinant boards to be contentious, but in practice, in Germany, when worker and shareholder representatives hold equal or near-equal power, they tend to operate by consensus. One reason might be the existence of works councils, which have extensive consultation, information, and co-determination rights in areas such as work hours, safety, and organizational or staffing changes, and can directly negotiate with the employer. Works councils do not exist in the United States, but they have a purview similar to that of labor unions in the United States, except that they participate in setting principles of wage setting rather than engaging in direct negotiations over wage levels, as U.S. unions do.

Only roughly 9 percent of workplaces in Germany have works councils, but they are overrepresented at larger workplaces. This means they cover 42 percent of employees in the former West Germany and 35 percent in the former East Germany. In part as a result of these structural differences, with works councils present at many larger businesses, there tends to be, in general, greater cooperation between labor and management in Germany.

In 1994, all this changed abruptly. The German federal parliament, the Bundestag, passed legislation exempting all new corporations from the worker representation mandate while maintaining it for existing companies. The rationale for treating old and new companies differently was that existing companies had already become accustomed to shared governance. Researchers Jäger, Schoefer, and Heining, however, say this was a legislative compromise between those who wanted to retain the status quo and those who wanted to abolish the mandate entirely. (The new law made no changes in works councils.)

To understand the effect of this change and to estimate the impact of co-determination on company and worker outcomes, Jäger, Schoefer, and Heining measured a number of metrics for companies incorporated 2 years before and 2 years following the change in law. This creates a sample of companies created under more or less similar economic conditions and average productivity levels, but incorporated under different legal frameworks. Thus, all the firms were incorporated between August 10, 1992 and August 10, 1996. Those incorporated before August 10, 1994 were subject to the mandate; those incorporated after that date were not.

To ensure the robustness of their findings, the researchers tested a number of factors to ensure that nothing about that particular time period distorted the results. So, they also compared these firms with publicly held companies that were subject to the mandate and then released from it in 1994, and with limited liability corporations, which were never subject to the mandate. This helped to ensure that any changes post-1994 were not due to overall changes in the economy or other outside factors affecting business more generally. Jäger, Schoefer, and Heining did additional testing of other potential factors as well to ensure that changes were likely due to the boardroom legislation and not other issues.

It's also important to note that the legislative compromise was unanticipated, and that it was implemented literally the day after it was both announced and enacted. So, there was no gap in incorporations just prior to the change in the law, which might have suggested deliberate avoidance of the mandate. And there was no rush to incorporate immediately following it, which might have suggested the same.

Generally, Jäger, Schoefer, and Heining found no significant impact on overall wages or employment. In fact, they found a slight increase in capital assets and significant upward movement in capital share, not labor share, due primarily to an increase in worker productivity. In other words, under shared governance, the same number of workers being paid essentially the same amount produce more value per worker, and that value is accruing to capital, not labor.

There does appear to be a significant reduction in outsourcing as a result of co-determination. Outsourcing is credited with decreasing average labor standards and worker outcomes across an economy. But for firms and their shareholders, the bottom line is that there is a slight increase in capital assets, and neither revenues nor profits appear to be significantly affected.

This also suggests that giving workers a voice in corporate decision-making does not lead to deleterious outcomes, such as bankruptcy, due to workers' potential differing priorities. Important, too, is that corporate policy doesn't affect only shareholders' bottom lines. Companies also employ the workers and provide goods and services to the consumers who are both the bedrock of our economy.

Research like this can only speculate as to the reasons for these results and how they might differ if shared governance on corporate boards were adopted in the United States. Shared governance has existed in Germany for nearly seven decades, so the management and workers of firms that remained under the pre-1994 mandate had essentially known nothing different. Results could be different if new corporate governance rules were enacted for U.S. companies unused to shared governance.

More research could give policymakers, workers, and corporate leaders alike a stronger basis for projecting possible outcomes. But this new research by Jäger, Schoefer, and Heining does suggest that workers being given a greater voice in the workplace does not lead to the negative economic outcomes purported by anti-labor critics, such as unsustainable levels of pay or workers embracing luddite-like resistance to technological change.

Their findings also might reflect the more cooperative labor relations that are prevalent in Germany, although it may be that those cooperative relations are partly a result of shared governance. The consensus nature of supervisory boards in Germany suggests that shared governance—over the long run—can produce good results for workers, companies, and the economy. Here in the United States, researchers could look at the experiences of worker-owned companies or companies with significant employee stock ownership plans (so workers are essentially shareholders) to see whether parallels with the German experience are germane.

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China's Rebound Helps to Stabilize a Shattered World Economy [feedly]

China's Rebound Helps to Stabilize a Shattered World Economy
https://www.bloomberg.com/news/articles/2020-10-18/china-s-rebound-helps-to-stabilize-a-shattered-world-economy

China's recovery from the coronavirus slump continued in the third quarter and showed signs of broadening in September, keeping the economy on track to be the world's only major growth engine and validating Beijing's aggressive approach to controlling the pandemic.

Gross domestic product expanded 4.9% in the third quarter from a year ago, missing economists' forecast for a 5.5% expansion. Both retail sales and industrial production gained momentum in September, reassuring markets that the recovery is intact.

The numbers show China's early and fierce containment of the virus has set the economy up for a faster rebound than any of its peers. That's a rare positive for a global economy still clawing its way out of its worst slump since the Great Depression -- a revival further complicated by the resurgence of Covid-19 in Europe and the U.S.

"It's an encouraging and hopeful message for the rest of the world," said Rob Subbaraman, global head of macro research at Nomura Holdings Inc. in Singapore. "If you successfully handle the health crisis, your economy can recover."

Retail sales expanded 3.3% in September from a year earlier, industrial production grew 6.9% and investment growth accelerated to 0.8% in the nine months to the end of the quarter. Strong import growth in the third quarter may have dented the GDP number, even though it's broadly seen as a bullish sign for demand.

Read More:A Dive Into China's GDP Details Shows Recovery Broadening Out

Output expanded 0.7% in the year to date, meaning that the world's second-largest economy has now regained all the ground it lost in the early months of the year.

Markets were mixed on the news. The CSI 300 Index of stocks, which last week was within 1% of a five-year high, slipped 0.3% as of the mid-day break in Shanghai. The yuan was little changed near 6.7 per dollar, after briefly trading at its strongest in 18 months.

Underpinning the recovery has been the containment of the virus that has allowed factories to quickly reopen and capitalise on a global rush for medical equipment and work-from-home technology. That export strength was offset by a recent increase in imports, depressing the contribution of net trade to output growth.

"That should not be viewed negatively," said Liu Peiqian, China economist at Natwest Markets Plc in Singapore, because the strong import growth suggests the recovery in underlying economic growth is accelerating.

The improving picture has come with relatively restrained government borrowing and central bank easing compared to China's peers. Instead, the government has focused on targeted support for business and the central bank on keeping liquidity flowing; today's readings suggest there's no need to change tack.

What Bloomberg's Economists Say

"The data -- on balance -- suggest there is no urgency for the government to add fresh stimulus, though the window is not completely closed for a rate cut by year-end. The focus is still on targeted measures. Heading into next year, whether the tax measures are extended will shape the optimal mix of fiscal and monetary policy. In the event fiscal support is rolled back, more rate cuts are likely."

Click here to read the full report.

Chang Shu, chief Asia economist

Central bank Governor Yi Gang said Sunday that China has "pro-active fiscal policy" and "an acommodative monetary policy to support the economy."

"Right now, China has basically got Covid-19 under control," Yi said in a webinar organized by the Group of 30. "In general, the Chinese economy remains resilient with great potential. Continued recovery is anticipated which will benefit the global economy."

Yet the recovery isn't without its holes.

Even with the virus beaten back, shoppers have spent about 7% less in the first nine months of the year compared to the same period last year. Services sectors including tourism, education and travel are continuing to lag.

"The economy is not entirely back in its strongest shape," Helen Qiao, chief Greater China economist at Bank of America, told Bloomberg Television. "The services sector is not doing that well."

China Growth Accelerates, Broadening Recovery From Pandemic

Watch: China's economic recovery from the depths plunged during the Covid-19 pandemic continued.

(Source: Bloomberg)

It's also unclear how durable the recovery will prove to be given domestic pressures from unemployment and rising corporate and household debt. China Evergrande Group, the world's most indebted developer, has rattled investors amid fears for its financial health.

Much will also depend on how relations with the U.S. evolve after November's presidential election. Any worsening of trade frictions could throw a spanner in the export revival.

Analysis of International Monetary Fund data shows the proportion of worldwide growth coming from China is expected to increase from 26.8% in 2021 to 27.7% in 2025, according to Bloomberg calculations. The IMF says Chinese growth is virtually the only reason it expects global output to be 0.6% higher by the end of 2021 compared to the end of 2019.

Getting the economy quickly back on its feet is crucial to China's global ambitions. They were hammered home last week by President Xi Jinping during a tour of tech-hub Shenzhen, where he doubled down on calls to take the global lead in technology and other strategic industries.

Urging an "unswerving" commitment to technological innovation in a period of "changes unseen in a century," Xi again promoted a need to become more self reliant, a policy that is expected to be a central part of a new 5-year economic plan that will be discussed at a Communist Party gathering expected later this month.

Nearer term, the return in consumer confidence has set the economy up for a strong finish to the year, said Natwest's Liu. "GDP is on track to grow further into the fourth quarter."

— With assistance by Enda Curran, Lin Zhu, Miao Han, James Mayger, Tian Chen, Fran Wang, and Matt Turner

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