The turbo-charged phase of the American economy’s rebound from the covid-19 pandemic is over. Growth in the third quarter tumbled to an annual rate of just 2%, below already weak expectations and well down from 6.7% in the second quarter. In normal times, a few months of 2% growth would have been seen as a little soft but nothing to get overly worried about. But given that America is still recovering from last year’s deep pandemic-induced recession, it is unquestionably disappointing. The fast expansion of the previous few quarters was on course to bring the economy back nearly in line with where it would have been by now, to judge by pre-covid trends. The latest quarter shows that a big gap still remains (see first panel of chart).
There are three main reasons for the economy’s deceleration. First, just when it looked like America was beginning to put the pandemic behind it, the Delta variant reared its head, as it did globally. A summer that began with busy restaurants, camps reopening and flight bookings ended with a new wave of caution. Consumer confidence, as judged by surveys, fell throughout the third quarter.
Second, strained supply chains took a toll on output. From semiconductors to sofas, a wide range of products have suffered from shortages. Factories around the world, especially in Asia, themselves struggled to meet demand amid the pandemic. And once goods arrive in America, they face further delays thanks to backlogged ports and trucking companies desperate for drivers.
Finally, the generous fiscal support that the federal government extended at the height of the pandemic faded away. The last of three stimulus checks to individuals was issued in March, and households have started to run down their savings. Meanwhile, expanded unemployment benefits expired in early September.
A closer look at the third-quarter data shows how these different factors came together to weigh on American growth. Most striking was a pronounced drop in the contribution of consumption to the economy (see second panel of chart). In the second quarter, the increase in consumer spending boosted GDP by 7.9 percentage points. In the third quarter, its contribution dropped down to just one point. That stemmed more from supply bottlenecks than a shortfall in demand. For instance, sales of motor vehicles and parts fell by nearly 20% from the second quarter, a major drag on consumption, as dealerships were emptied out.
Growth would have looked even worse but for the oddities of GDP accounting, which are especially magnified when quarterly outcomes are presented in annualised terms. Although businesses continued to run down their inventories, they did so much less acutely than in the second quarter, which allowed inventories to contribute two percentage points to growth.
As disappointing as growth was in the third quarter, there are also some rays of optimism peeping from the data. The Delta wave spread quickly but has now receded. Strong orders for capital goods suggest that businesses could be preparing to ramp up their investment spending. A jump in consumer confidence in October bodes well for holiday spending over the next couple of months. And crucially, the balance of spending is beginning to swing in favour of services, as more people travel, go to concerts and eat in restaurants.
That, in turn, should help alleviate some of the pressure on supply chains as consumers shift from buying things to buying experiences. It could also, just as importantly, alleviate some of the pressure on inflation, which has been driven by surging prices for physical goods. Moreover, there is still plenty of scope for the economy to catch up to, or at least close the distance with, its pre-pandemic expectations. Growth in America may be weaker than just a few months ago, but the economy is still healing.
This article is from our Graphic detail section.