as Supply Problems Weighed on the Economy
- Real GDP growth was 2.0% in the third quarter, somewhat below expectations.
- Production problems weighed on growth, with a big decline in auto sales. Construction and business equipment spending were also drags due to supply issues.
- Trade was a big drag, due in large part to a pickup in overseas travel by Americans.
- Inventories were a large positive for growth in the third quarter and will remain so going forward.
- Inflation increased on a year-over-year basis but slowed on a quarter-to-quarter basis. The worst of the inflation surge is over.
Real GDP growth was 2.0% at an annualized rate in the third quarter of 2021, according to the preliminary estimate from the Bureau of Economic Analysis. This was below expectations for growth of 2.8% annualized. Growth was 6.7% in the second quarter of 2021. On a year-over-year basis, growth was 4.9% in the third quarter.
Consumer spending increased 1.6% at an annualized rate in the third quarter, adding 1.1 percentage points to annualized growth. There was a huge drag from durable goods, especially auto sales, as production problems led to a steep decline in sales. Autos and parts subtracted 2.4 percentage points from growth in the third quarter. But consumer services spending increased almost 8% annualized in the third quarter, adding 3.7 percentage points to growth. Nondurable goods spending also rose, adding 0.4 percentage point to growth.
Business fixed investment increased an annualized 1.8% in the third quarter, adding 0.2 percentage point to growth. Investment in equipment declined, likely due to supply-chain issues, as did investment in non-residential structures. There was a solid increase in business investment in intellectual property.
Residential investment fell almost 8% annualized in the third quarter, subtracting 0.4 percentage point from growth. Shortages of building materials and construction workers weighed on activity, despite strong demand for new housing and repairs and renovations.
Government expenditures in GDP rose less than 1% annualized in the third quarter, adding 0.1 percentage point to growth. An increase in state and local spending offset a decline in federal spending.
Trade was an enormous drag on growth in the third quarter, despite problems in getting goods from overseas. Imports rose 6.1% over the quarter annualized; there was an enormous increase in services imports from increased US travel overseas. Exports fell 2.5% in the third quarter. With exports down and imports up, trade subtracted 1.1 percentage points from third quarter growth.
Inventories added 2.1 percentage points to growth in the third quarter. Inventories are very low relative to sales; this is costing businesses, and they are desperate to increase their inventories. Despite supply-chain difficulties inventories rose for the first time in six quarters in the third quarter. Inventories will continue to add to growth in the near term as businesses restock.
Final sales of domestic product-GDP minus the change in inventories, which measures demand (domestic and foreign) for U.S.-produced goods and services-was down slightly in the third quarter, as inventories were a big contributor to growth.
The overall GDP price index rose 5.7% at an annual rate in the third quarter, down slightly from 6.1% inflation in the second quarter. On year-over-year basis economy-wide inflation was 4.6% in the third quarter, up from 4.1% in the second quarter, and the fastest pace since 1983.
The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, increased 5.3% annualized in the third quarter, down from 6.5% inflation in the second quarter. The core PCE price index, excluding food and energy prices, was up 4.5% in the third quarter, down from 6.1% in the second quarter. On a year-over-year basis the PCE price index was up 4.3% in the third quarter, with the core index up 3.6%. These are the fastest year-over-year inflation rates in more than 20 years.
The third quarter GDP report was a mixed bag. Growth was weaker than expected because of supply-chain disruptions, particularly for autos, building materials, and business capital goods. But underlying demand remains very strong. Trade was also a huge drag, in large part because U.S. travel overuses surged, boosting imports. But underlying demand remains very strong. The automakers have a huge incentive to solve their supply chain issues, and once they do production and sales will soar. Other businesses will also work hard to increase production given strong demand. And inventories were a big boost to growth in the third quarter and will remain over the next few quarters.
Growth will be stronger in the fourth quarter of 2021 and the first half of 2022 as these issues are worked out and production gradually returns to normal. The trade deficit will shrink as travel flows stabilize, exports increase, and import growth slows. With about $2 trillion in extra saving, consumers will be looking to buy as the pandemic fades. Growth in consumer services spending will be especially strong; adjusted for inflation, it is still almost 2% below its pre-pandemic level. The biggest upside risk to the outlook is passage of the Biden administration infrastructure proposals.
The worst of the recent inflation surge is over. Inflation accelerated on a year-over-year basis in the third quarter but slowed on a quarter-to-quarter basis. Prices are leveling off or declining for many goods and services that have seen price surges in recent months. And although wage pressures are building, businesses will absorb some of these higher costs in their margins, and worker productivity is increasing. Inflation will be somewhat higher than the Federal Reserve’s 2% objective in 2022 but will slow and will gradually settle in at around 2% over the longer run.
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