Economic expansion slowed sharply in the third quarter
The expansion slowed sharply in the third quarter to grow at a 2.0% rate — well off the robust pace of above 6% in the first half of the year. That result was below the already downwardly revised forecasts for the quarter, making the report an overall disappointment.
The story was resoundingly, although not exclusively, one of the changing consumer appetites for goods and services as they adjusted to rising prices, outright shortages for a range of goods, and the ongoing disruptive effects of the pandemic on the economy.
Why the marked change in consumer spending activity? As with many measures of the current state of the economy, the answer is complicated, reflecting challenges on both the demand and supply sides.
The effects of fading fiscal stimulus are evident, as binge-buying by households that were flush with cash earlier in the year has faded. Higher consumer prices are also taking a toll, chewing away at consumers’ abilities to continue to spend more in real terms, despite evidence of strong, sustained wage growth in a tight labor economy.
Concerns about the late-summer surge in the COVID-19 Delta variant was evident in gauges of consumer sentiment, which had dipped temporarily before rebounding in October as daily case counts receded. That may have put a relative damper on some spending, particularly on in-person services, which still performed much better than goods consumption. Consumer spending on services grew by 7.9% for the quarter — a moderately slower pace of growth than in the preceding three months, but a solid advance nonetheless. Absent COVID-19 considerations, the resurgence in the service sector would’ve likely been even better.
One relative bright spot over the past year had been a spending surge for durable goods, including cars and electronics. That changed, as durable goods consumption plunged by over 26% during the quarter. The persistent shortage of semiconductor chips is taking a bite out of production, curtailing the availability of cars and other consumer products due to production delays.
Government spending increased modestly due to an uptick in state and local spending, offsetting a 4.7% decline in consumption by the federal government. Although Washington continues to spend at a rapid clip, those dollars have flowed out in the form of transfer payments and other programs that aren’t directly reflected in GDP. Instead, the stimulative effects are indirectly reflected in spending by households and state and local governments.
If there’s good news to be found in a largely disappointing report, it’s that the expansion continued, despite numerous headwinds to growth. Consumers are financially well positioned for spending to reaccelerate, supported by rising home prices and retirement portfolios, worker-friendly labor market conditions, and strong wage gains.
The bigger questions lie on the supply side of the economy. How long will it take for the plumbing of global supply chains to be unclogged? Will rising wages lure more Americans back into the labor force to fill an abundance of job openings? How long will inflation remain elevated, weighing on growth? Those are challenges that can’t be fixed overnight but are still expected to ease in the coming quarters.
The bottom line? The slowdown in the economy was expected, but its magnitude is a disappointment. A moderate pickup is still expected in the coming months, but a return to the brisk growth pace that characterized the first year of the recovery appears highly unlikely.
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