The delta variant, disruptions to global supply chains and inflation all took a powerful toll on U.S. gross domestic product in the third quarter as the pace of growth slowed to 2% from 6.7% in the prior quarter.
The toll was most evident in household spending, which moderated to 1.6% as disrupted supply chains resulted in a 26.2% decline in outlays on durable goods.
On a year-ago basis, GDP increased by 4.9%, while on a nominal basis, GDP expanded at a 7.8% rate on the quarter, according to government data released Thursday.
The toll was most evident in household spending, which moderated to 1.6% as those disrupted supply chains resulted in a 26.2% decline in outlays on durable goods.
As expected, the buildup of inventories ahead of the holidays contributed 2.07% to overall growth on the quarter, which is somewhat better than expected given the pervasive problems in getting goods to market.
The inventory buildup should dampen some of the overhyped notions that store shelves will be empty ahead of the holiday season. That will not be the case, and consumers will move forward on what should be record holiday spending that is the core of our expectation of a 4.6% rate of growth in the current quarter.
The silver lining
But the silver lining inside this otherwise dour report was an 11.7% increase in gross private investment that was underscored by a 12.2% increase in productivity-enhancing intellectual property.
The forward-looking components of GDP look a bit better than the components affected by COVID-19 and suggest that conditions are ripe for an improvement in productivity that will help ease inflationary pressures.
In addition, central bankers are likely to interpret this data as working in favor of their outlook and we would not be surprised if market participants in the coming days somewhat ease their expectations of rate hikes next year.
This data will not increase the Federal Reserve’s urgency to significantly pull forward the start of the first rate hike. We continue to expect that will not occur until the first quarter of 2023.
Alternative metrics of growth reflected the sharp rise in inflation on the quarter with real final sales declining by 0.1%, gross domestic purchases advancing by 3.1%, final sales to domestic purchasers improving by 1% and final sales to private sector domestic purchasers increasing by 1.1%. Disposable personal income on the quarter declined by 5.6%.
Consumption
Consumption contributed 1.09% to growth in the third quarter. Outlays on goods slowed significantly to 1.6% from a torrid 12% during the second quarter as spending on goods declined by 9.2%. Spending on non-durables increased by 2.6% and the pivot to service spending increased by 7.9%. We expect that the rising demand for services will be sustained as the delta variant continues to fade, unemployment declines and wages rise.
Gross private investment
Gross private investment contributed 1.94% to overall growth on the quarter. Fixed business investment declined by 0.8% mostly because of a 7.3% decline in outlays on structures and a 3.2% drop in equipment spending. The latter is almost certainly a function of the supply chain disruptions and will improve as bottlenecks in transportation are resolved. Residential investment contracted by 7.7%.
Government spending
Government consumption added 0.14% to growth on the quarter. Outlays by governments advanced by 0.8%, driven by a 4.4% increase in state and local government spending. National defense spending dropped by 1.4% and non-defense spending by the federal government declined by 9.2%.
Net exports
Net exports provided a 1.1% drag on overall growth during the quarter. Exports declined by 2.5%, while imports advanced by 6.1%. Imports of goods dropped by 0.1% as imports of services jumped by 44.4%. Exports of goods declined by 5.1% and services increased by 3.8%.
The takeaway
While there is no way to paint this outcome as anything but disappointing compared to the expectations of greater than 6% growth just a few months ago, the significant slowing in COVID-19 cases amid a return to form among American consumer spending in September and falling jobless claims all point to a flood of income into households that will almost certainly underscore robust economic expansion in the current quarter.
