The headlines over the past time reported a significant deceleration in US economic growth in the third quarter.
Yet it is not likely that this reflects a new trend in demand. Rather, there is considerable evidence that the slowdown was due to two important factors: supply chain disruption and the outbreak of the delta variant of the virus. For now, the delta variant is abating. In addition, there is reason to expect that supply chain disruption will wane over time as demand for goods lessens and supply constraints in Asia ease.
In any event, here are some details: Real GDP increased at an annualized rate of 2.0% from the second to the third quarter. This was a substantial deceleration from the 6.7% growth in the second quarter. The biggest change from the previous quarter was a sizable shift in consumer spending on goods. Having grown at a rate of 13.0% in the second quarter, goods spending fell at a rate of 9.2% in the third quarter. Moreover, this was mainly due to a decline in spending on durable goods that fell at a rate of 26.2%. In addition, that decline was largely driven by a big drop in purchases of automobiles. The latter was likely due to the shortage of semiconductors which is disrupting supply chains in the industry.
Despite the sharp decline, real spending on automobiles remained 5.2% above the pre-pandemic level in the fourth quarter of 2019. Overall consumer spending on goods was 15.2% above the pre-pandemic level. Thus, even as goods spending declined, the level of spending was unusually high, thereby contributing to supply chain stress and rising prices.
Although consumer spending on services continued to grow in the third quarter, it decelerated sharply from 11.5% growth in the second quarter to 7.9% in the third quarter. There was an especially sharp deceleration in spending at restaurants—indicative of the effect of the delta variant on social interaction. Overall spending at restaurants remained below the pre-pandemic level.
If spending on automobiles and restaurants had grown in the third quarter at the same pace as in the second quarter, then real GDP would have grown at a rate of 6.6%—almost the same as the second quarter. Thus, the sharp deceleration in GDP growth can largely be attributed to supply chain disruption and the impact of the delta variant.
As for business behavior, investment in equipment fell at an annual rate of 3.2% while investment in structures fell at a rate of 7.3%. These declines were more than offset by a sharp 12.2% increase in investment in intellectual property. Thus, overall business investment increased at a modest pace of 1.8%. Business investment in inventories increased strongly, offsetting the decline in the previous quarter. Residential investment fell at a rate of 7.7%, slower than the decline in the second quarter.
Both exports and imports of goods declined in the third quarter. However, imports of services increased sharply. Overall, trade made a negative contribution to GDP growth. Finally, Federal government purchases fell sharply in both the second and third quarters as fiscal support for the economy waned. If the US Congress passes the infrastructure bill now under consideration, this will likely have a positive impact on purchases in the quarters to come. State and local spending increased at a healthy rate of 4.4%.
Regarding inflation, the GDP report provided evidence that inflationary pressures are abating. The personal consumption expenditure deflator (often call PCE-deflator), which is the favorite measure of inflation of the Federal Reserve, increased at an annual rate of 5.3% in the third quarter, a deceleration from the 6.5% increase in the second quarter. Interestingly, and not surprisingly, the price index for consumer durable goods was up at a rate of 9.6% in the third quarter while the index for consumer services was up at a rate of 4.2%. In other words, prices rose strongly in the category that was most disrupted by supply chain problems. This offers hope that, when supply chain issues are resolved, inflation will decelerate. That, in fact, is one of the arguments suggesting that current inflation will turn out to be transitory.