Already lowered expectations for third quarter gross domestic product (GDP) growth were still a bit too high as economic growth came in well short of expectations.
Still, though, we believe the main drivers of the weakness should subside over time.
The Bureau of Economic Analysis released its preliminary estimate for third quarter GDP this morning, showing the US economy grew at a 2.0% annualized pace against the Bloomberg median forecast for 2.6%. This represented a major slowdown compared to the second quarter’s 6.7% pace, and is especially disappointing given that earlier in the year investors had earmarked the back end of 2021 for a major growth reacceleration. But those hopes have likely been pushed back rather than dashed completely.
“The positive spin on today’s report is that the Delta variant and supply issues, two areas that we expect to eventually self-correct, are the main culprits for the weakness,” said LPL Financial Chief Market Strategist Ryan Detrick. “Consumers’ willingness and ability to spend remains strong, and we expect them to do just that once temporary roadblocks are removed, powering future growth.”
As seen in the LPL Chart of the Day, consumption, pulling back from 12% last quarter to 1.6% this quarter, drove the substantial slowdown.
Supply chain constraints weighing on growth were most evident in the goods versus services breakdown. In prior periods of COVID-19 flare-ups, consumption patterns favored goods over services, which often tend to occur in person. In the third quarter, though, this pattern was reversed. The chief reason for this was a decline in durable goods, most notably motor vehicles, which have contended with widely-reported semiconductor shortages.
Residential fixed investment, i.e., construction, likely suffered from well-documented labor shortages and high materials costs in declining for a second consecutive quarter. Business fixed investment appeared to favor technology-based investments over physical ones, a trend often associated with productivity gains down the line. Finally, the volatile inventory component did jump strongly for the quarter, reflecting an attempt on the part of businesses to replenish stockpiles, something we expect to continue to support economic growth in coming quarters.
Looking forward, we expect a rebound in growth in the fourth quarter and beyond. Consumer spending should be solid, as consumers are still benefitting from significant excess savings, partly related to prior government stimulus. Momentum in services as in-person commerce picks up and COVID-19 wanes should continue, and bottlenecks in goods-producing areas should improve.
We acknowledge, though, that resolution of supply chain issues are likely to take more time than originally forecast and the pickup in growth may be choppy. We expect businesses to continue to invest in productivity-enhancing areas in the meantime, and net exports may improve as the rest of the world plays catch-up to the U.S. in their recoveries, consuming more of our goods and services. The outlooks for government spending and inventories are favorable.
Much more on our economic outlook for next year coming soon in our Outlook 2022 publication in early December.
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