October 26, 2021
Gross Domestic Product, 3rd Quarter 2021 (Advance Estimate) is scheduled for release by the Bureau of Economic Analysis on Thursday, October 28, 2021, at 8:30 AM Eastern Time.
We Are Likely to See Limited Growth This Quarter, As Supply Chain Problems Hampered Production
The strong growth we saw in the first two quarters is likely to slow sharply in the third quarter. Consumption has been constrained as many items, most notably cars, have been in short supply due to supply chain problems. The spread of the delta variant has likely also played a role, but more by discouraging people from working than directly limiting economic activity. The healthy growth in sectors that are most sensitive to the spread of the pandemic, such as restaurants and entertainment, indicates that people are returning to pre-pandemic spending patterns in spite of the spread of the pandemic.
Consumption Growth Is Likely to Slow Sharply
Most of the falloff in GDP in the pandemic was due to reduced consumption, primarily in services. Therefore, it is not surprising that a rebound in consumption led the recovery. In the last two quarters, consumption grew at a double-digit annual rate. Consumption growth will be far more modest in the third quarter. This is partly because people who bought big ticket items like cars or appliances will not be buying them again, partly due to supply chain issues that have slowed delivery, and partly due to fact that people didn’t get any pandemic checks in the quarter.
Saving Rate Remains Above Pre-Pandemic Levels
Inflation hawks like Larry Summers argued that people would be spending down the savings they had accumulated during the period where large sectors of the economy were shut down, and they were getting the pandemic checks from the government. That would imply that the saving rate would be unusually low at present, as people spent from the wealth they recently accumulated. That does not appear to be happening, or at least not yet. The saving rate is still well above the 7.5 percent average for the last three years.
The saving rate averaged 9.8 percent in the first two months of the quarter. If the saving rate remains high, it creates a gap in demand that needs to be filled from other sources. Increased investment, as well as government spending, are the obvious candidates.
Rising Trade Deficit
In spite of the difficulties with unloading ships at our ports, the trade deficit has risen sharply since the pandemic began, increasing from 2.8 percent of GDP in 2019 to 3.9 percent in the second quarter. It may increase still further in the current quarter. However, the rise in the trade deficit, like the increase in the saving rate, also creates a gap in demand in the economy. In terms of creating space for other spending, a rise in the trade deficit equal to 1.0 percentage point of GDP would be equivalent to a tax increase of more than $250 billion in 2022 and more than $3 trillion over the next decade.
Inventories Will be Less of a Drag in the Third Quarter
A decline in inventories has been a major drag on growth in the last two quarters. The slower rate of accumulation knocked 2.6 percentage points off growth in the first quarter and 1.3 percentage points in the second quarter. While the supply chain problems have likely led to a further decline in inventories in the third quarter, the drag on growth is likely to be less just because the decline was so large in the second quarter. In constant dollars, inventories fell at a $169 billion annual rate in the second quarter. It is unlikely that the rate of decline will be much higher in the third quarter and may actually be somewhat slower, meaning that inventories could be a positive factor for growth.
Housing
Housing construction soared last year in response to lower interest rates and people’s decision to move away from high-priced metropolitan areas. It slowed some in the second quarter, but was still more than 15 percent higher than in the fourth quarter of 2019. Housing will likely show little change in the third quarter, partly because of material shortages. Current construction rates should help to alleviate pressure on the market if they can be sustained.
Investment
Investment has remained strong throughout the pandemic. While investment in structures has lagged due to less demand for office and retail space, equipment investment was 6.1 percent above its level in the fourth quarter of 2019, and investment in intellectual products was 9.5 percent higher. We will likely see this pattern continue in the third quarter. Strong investment should help to boost productivity in the years ahead.
Productivity and Inflation
The uptick in productivity growth since the pandemic began has not gotten the attention it deserves. GDP was almost 1.0 percent higher in the second quarter of the year than in the fourth quarter of 2019, even though hours worked were 3.5 percent lower. This rate of productivity growth may not be sustained, but if any part of the pickup continues, it will go far towards offsetting inflationary pressures.
The shipping backlogs in the supply chain are likely to dwindle after we get through the holiday season, which should then place considerable downward pressure on the prices of a wide range of items. If that proves to be the case, concerns over inflation will be short-lived.
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