EconoFACTS

October 28, 2021 | 09:09

U.S. Real GDP (2021 Q3 Advance)-- Transitory Slowdown

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

The U.S. economy finally hit a pothole in the third quarter, but it is set to re-accelerate in the current period. Real GDP slowed more than expected to an annual rate of 2.0% in Q3, down from 6.7% in Q2 and marking the weakest quarter since the shutdowns. Delta slammed confidence, delayed travel plans, and led to some new restrictions. Port logjams worsened, while chip shortages slashed auto production, leaving even fewer vehicles available to purchase. Government income support faded. Consequently, consumer spending growth downshifted sharply to 1.6% from Q2’s 12.0% rebates-led pop. While spending on services rose (albeit at a slower rate than in Q2), demand for goods shrank, reflecting less pent-up needs and supply shortages (notably for autos). A record trade deficit also hammered growth to the tune of 1.1 ppts, as goods exports fell on weaker global demand, supply-chain disruptions, and jammed ports. Imports rose, reflecting a big jump in services (i.e., travel abroad). Residential construction unexpectedly fell, though it looks to turn higher in Q4 given the recent housing market revival. Federal government spending also fell sharply, with some offset from increased spending at the state/local level that is benefiting from earlier federal measures to increase funding.

In the plus column, business investment eked out a gain, albeit much less than expected, as increased spending on intellectual property products (like software) more than offset an expected drop in commercial construction (don't need too many new office towers these days) and an unexpected pullback in equipment spending (the first since the shutdowns), despite surging corporate profits. Less beaten-down inventories added a whopping 2.1 ppts to growth.

Despite the setback in Q2, the economy is now 1.4% larger than before the pandemic. Inventory rebuilding will provide further support once pent-up supply and production are released, though this awaits an ebbing in bottlenecks and the microchip shortages that now look to persist well into next year. Still, as the Delta wave recedes, consumer spending is turning higher, with the latest data showing increased hotel occupancy and restaurant visits. Rising employment (initial claims fell further last week) and wages, as well as massive excess savings, will provide a tailwind for households, countering the drain from fast-rising prices. Holiday sales look to be very strong this year...if stores can find enough workers to deliver them. Q4 GDP growth could easily double from the Q3 pace.

Table 1 - United States — Real GDP

(quarter/quarter % change : s.a.a.r.)

Source: BMO Economics, Haver Analytics