Q3 GDP estimates increased to 2.3% growth
A final reading of 2.3% growth in the third quarter officially marks the weakest quarter for the economy since the pandemic recovery began in mid-2020, while providing some reassurance that the slowdown wasn’t as severe as previously believed. Data confirming the late summer weakness is no surprise; the COVID-19 Delta variant wave that swept through the country put a damper on activity, even as the boost that had been provided by multiple rounds of fiscal stimulus was fading. That was clear even in the absence of official data.
Consumer spending – far and away the largest driver of the U.S. economy – grew by 2.0% for the quarter. While better than expected, it was the slowest pace of expansion since the precipitous 33% decline in the second quarter of 2020.
The consumer story was a nuanced one though, illustrating a clear divergence in consumers’ recent spending preferences. With much of the country locked down and extra cash in their pockets, consumers had spent aggressively on goods over much of the past year, while the rebound in the service industry was more measured. That changed markedly in the third quarter. Consumer spending on goods fell at an 8.8% pace, while services expanded at a brisk 8.2% rate.
Of particular note was the sharp drop in durable goods spending, which fell by nearly 25%. While that likely reflects in part some diminished demand following the spending binge of the past year and the effect of higher prices, it’s also a byproduct of challenged supply chains and production bottlenecks. Consumers can’t buy what they can’t find, even if they have the cash in hand.
Although supply-chain kinks are far from resolved, there were signs that inventory shortages may be easing after a tough six months. Private inventory accumulation added 2.2% to overall growth for the quarter, mitigating the drag from lower exports, higher imports, reduced housing activity, and curtailed federal government spending.
The elephant in the room is inflation, which has taken a significant bite out of real economic growth in recent months. Although personal income has risen at a solid clip, consumers are facing down the largest broad market price increases in over a generation. The core PCE deflator increased at a 4.6% annual rate in Q3, down from 6.1% in Q2, but still reflective of an economy that is still feeling the disruptive effects of the pandemic. That has the attention of the Fed, which recently announced an acceleration in its previously communicated tapering plans and an earlier commencement of interest rate hikes.
The dynamics that boosted GDP figures in the first half of 2021 were unique in nature – abundant government stimulus, broad-based business reopening, and the rollout of vaccines that contributed to a sense of optimism. Those tailwinds clearly faded in the third quarter. Looking ahead, economists expect to see growth rebound sharply in the last three months of the year. Strong retail sales figures from October and November suggest that the most important component of GDP, consumer spending, could provide a greater boost in the fourth quarter, although higher prices will be a headwind to growth in real terms.
The Omicron variant remains a risk to business and economic activity, with the potential to curb a smooth path forward for growth. That being said, it is extremely unlikely that policymakers replicate the broad economic closure characterized by the initial onset of COVID-19. We’ve adapted, and although the economy will continue to feel the effects of each successive COVID-19 wave, the response and economic fallout have lessened.
The bottom line? The U.S. economy grew in the third quarter, albeit at a slower pace than in the first half of the year. Looking ahead, fourth-quarter results are expected to strengthen, although the path ahead could remain challenging. It’s been an uneven recovery, and that could continue, but the underlying strength of the consumer and business sector should provide ample momentum for the expansion to push through the pandemic-related headwinds.
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