Canada Markets closed
  • S&P/TSX

    21,637.54
    -15.48 (-0.07%)
     
  • S&P 500

    4,704.54
    +15.87 (+0.34%)
     
  • DOW

    35,870.95
    -60.10 (-0.17%)
     
  • CAD/USD

    0.7936
    -0.0001 (-0.0095%)
     
  • BTC-CAD

    69,245.29
    -1,519.95 (-2.15%)
     
  • CMC Crypto 200

    1,402.14
    -65.80 (-4.48%)
     
  • GOLD FUTURES

    1,861.20
    -0.20 (-0.01%)
     
  • RUSSELL 2000

    2,363.59
    -13.42 (-0.56%)
     
  • 10-Yr Bond

    1.5890
    -0.0150 (-0.94%)
     
  • NASDAQ

    15,993.71
    +72.14 (+0.45%)
     
  • VOLATILITY

    17.59
    +0.48 (+2.81%)
     
  • FTSE

    7,255.96
    -35.24 (-0.48%)
     
  • NIKKEI 225

    29,683.09
    +84.43 (+0.29%)
     
  • CAD/EUR

    0.6979
    +0.0004 (+0.06%)
     

Economy grew just 2% last quarter as COVID-19 raged, supply snags slowed deliveries

·5 min read

The U.S. economy slowed substantially in the third quarter amid an armada of obstacles, including a surge in COVID-19 cases, supply chain bottlenecks, rising consumer prices and the fading effects of federal stimulus measures.

But with COVID-19 cases now tumbling and vaccinations rising, most economists are branding the weak showing a soft patch in a still-robust recovery from the pandemic-induced recession, with a healthy rebound projected in the final months of the year.

The nation’s gross domestic product, the value of all goods and services produced in the U.S., increased at a seasonally adjusted annual rate of 2% in the July-September period, the Commerce Department said Thursday. Economists surveyed by Bloomberg had forecast a 2.8% rise in GDP.

Consumer spending and business investment both pulled back sharply. Much of the GDP gain came from companies that simply drew down their stockpiles more slowly or replenished them after the supply problems caused them to deplete inventories the prior quarter.

The 2% bump in activity would have been deemed a solid performance for an economy that was growing just over 2% a year on average in the decade before the pandemic. But after economic output contracted 3.4% in 2020, rising vaccinations and $2.5 trillion in extra household savings – from stimulus checks and scaling back last year – set the stage for a historic upswing this year. The economy grew 6.3% and 6.7% in the first and second quarters, respectively.

Yet in the third quarter, coronavirus delta variant triggered a spike in cases and led many consumers to hunker down or temper their restaurant visits, travel and other activities. Vehicle purchases also dropped sharply as chip shortages continued to hinder auto production.

Consumer spending, which makes up 70% of economic activity, edged up just 1.6% following jumps of 11.4% and 12% the prior two quarters.

Also tamping down outlays: Yearlong supply snarls persisted or worsened, leaving many store shelves bare or low on popular products as pandemic-related shortages of truck drivers, as well as factory and warehouse workers, slowed deliveries. The snags drove annual inflation to 5.4% in September, matching a 13-year high and spooking many shoppers.

Meanwhile, the impact of federal relief packages over the winter that featured big stimulus checks for households and aid for small businesses is diminishing.

Even Hurricane Ida, which slammed into Louisiana in late August, played a role, knocking out power and curtailing the production of chemicals, and energy-related products, Barclays said in a research note.

The good news is coronavirus infections have fallen to less than half their recent peak of more than 170,000 a day in mid-September and 67.3% of Americans over 12 of have been fully vaccinated, according to the Centers for Disease Control and Prevention. Retail sales already reflect the improved health picture, Barclays notes, rising a sturdy 0.7% in September.

Economists surveyed by Blue Chip Economic Indicators estimate the economy will grow 5.3% in the fourth quarter as holiday purchases pick up steam despite the supply snags and 5.7% this year, which would still be the strongest pace since 1984.

"The slowdown in growth... Is likely to prove a one-off," economist Leslie Preston of TD Economics wrote in a note to clients.

How other parts of the economy fared last quarter:

Firms drew on stockpiles more slowly

Businesses have been pulling from inventories to meet demand amid the supply chain snarls, but last quarter the drawdowns weren’t as dramatic and some companies may have replenished their stocks.

As a result, that was the quarter's biggest bright spot. Business stockpiling added slightly more than two percentage points to growth after serving as a drag the previous two quarters.

Business investment slows

Business capital spending grew just 1.8% after double-digit gains, or close to it, the previous four quarters.

Outlays for computers, delivery trucks, factory machines and other accessories fell 3.2%. Spending on buildings, oil rigs and other structures declined 7.3%. Intellectual property spending accounted for the entire increase in business investment, rising 12.2%.

The supply chain problems weighed on business equipment outlays, says Wells Fargo economist Sam Bullard.

Previously, many firms were snapping up equipment to serve growing consumer demand for services as the economy reopened. They also have been buying technology for employees to work remotely.

Residential investment falls again

Housing construction and renovation fell 7.7% following an 11.7% drop the previous quarter. The industry had been booming the second half of 2020 and early this year. Demand for homes remains strong but the supply chain problems have slowed deliveries of materials and pushed up prices. The industry is also grappling with worker shortages.

During the pandemic, Americans moved to bigger houses in less crowded suburban areas or expanded existing homes, a trend that has continued even as some move people are moving back to cities as the health crisis eases.

Trade dings growth

Trade crimped growth for the fifth straight quarter as imports grew 6.1% while exports dropped 2.5%. U.S. imports grew as consumer demand remained relatively healthy despite the supply chain issues.

With other nations’ recoveries from the pandemic lagging behind the U.S. and the supply problems hampering shipments, exports fell.

Government spending edges higher

Government spending rose just 0.8% after falling 2% the previous quarter. Federal spending declined 4.7% as the Paycheck Protection Program for small businesses was winding down. Meanwhile, she says, the reopening of schools helped boost state and local spending by 4.4%.

This article originally appeared on USA TODAY: GDP Q3: Growth slowed to 2% amid COVID spike, supply chain snags

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting