The coronavirus tore through unvaccinated communities during much of the July-through-September period measured in Thursday's gross domestic product report, eviscerating economists' expectations from earlier in the year of continued rapid growth near the 6.3% and 6.7% seen in the first two quarters of 2021.
The White House, top lawmakers and economists are debating whether the weak GDP report reflects a blip on the way to a boom, or something more, especially as Democrats close in on a deal on President Joe Biden's $1.75 trillion budget plan overhauling health care, education and climate and tax laws.
Much will depend on the path of the virus, and whether higher prices, persistent supply chain issues and a wobbly job market dampens consumer spending going into the holiday season.
Thursday's report from the Bureau of Labor Statistics is a backward-looking glimpse at the economy's worst quarter since the recovery began. But looking ahead, economists say the numbers hid myriad reasons for optimism in the fourth quarter and beyond.
New coronavirus infections in the United States have dropped nearly 60% since the September spike brought on by the delta variant. Some of the biggest covid-era distortions in Americans' buying habits - like the car-buying boom that goosed inflation and ravaged supply chains - also started to normalize. And indicators from consumer confidence to unemployment claims have improved in October.
As positive trends pile up - and assuming no major stumbles in the final three months of the year - the economy should grow more than 5% over all of 2021. That would be its strongest year since 1984, when GDP grew more than 7% in a rebound from a double-dip recession.
Jason Furman, former President Barack Obama's top White House economist, listed the reasons he expects more growth to come. The economy is still below its potential had there never been a pandemic, so there's more room for "catch up" growth. Workers will return to work over time. covid cases are declining, and businesses have ordered up equipment that will eventually show up as investment in GDP.
"The economy has a lot of challenges," said Furman, a nonresident senior fellow at the Peterson Institute for International Economics. "It is unlikely to have the torrid pace of growth it had in the first half of the year, but there is a lot of room to move up."
Throughout the year, whipsawing demand and supply distorted consumer spending. The astonishing boost in income and spending fueled by federal aid in the first half of the year dried up in the third quarter just as other head winds intensified.
Sales of automobiles and parts, for example, skyrocketed almost 40% from the beginning of the pandemic through the second quarter, boosting GDP to new highs. But an 18% plunge followed in the third quarter, slashing 2.4 percentage points off GDP growth as chip shortages and persistent supply chain issues hampered the car market.
A separate drop in residential investment, which includes new home construction and renovations, also shaved 0.4 percentage points off economic growth, due to shortages of construction materials from wood frames to appliances.
But spending on services continued to rise, as consumers spent more on experiences and the economy continues to reopen, stoking economists' optimism about the final stretch of 2021. Already, consumer confidence is rebounding - it increased 3.6% in October after falling all three months of the third quarter, according to a Tuesday release from the Conference Board. Consumer spending is expected to ramp up around the holiday season. And, jobless claims have been ticking down for about a month, dropping to a new pandemic low last week, according to a separate report from the Department of Labor.
Still, there's never been a playbook for this recovery, apart from one constant: where the pandemic goes, so goes the economy. Officials in the White House and the Federal Reserve stress the importance of looking at many months or quarters of data - good or bad - to assess the economy's health.
The GDP report captured the three-month span when the economy went from revving up to tripping up. In July, the economy added a whopping 943,000 jobs, reinforcing hopes that people would pour back into the labor force going into the fall. But as the delta variant spread, the economy added only 235,000 jobs in August, and consumer confidence nosedived. Job growth in September (194,000 jobs) was the lowest since January, with hiring staying low in bars, restaurants and hotels.
Meanwhile, many of the supply-chain issues that pushed inflation to a 13-year high appear, in some cases, to have intensified. Policymakers at the Fed and the White House have started to acknowledge that inflation is turning out to be lasting longer, and rising higher, than initially expected, saying that prices won't come down until supply chains have time to clear up.
Businesses, for their part, are betting again on future growth. Joe Brusuelas, chief economist at RSM, pointed to a "silver lining inside this otherwise dour report" - an 11.7% increase in gross private investment, underscored by an increase in intellectual property. That helps signal businesses are making investments now that could pay off and make them more productive later.
"The forward-looking components of GDP look a bit better than the covid components," Brusuelas wrote in an analyst note.
Another cause for optimism: businesses were able to build up their inventories - or at least slow the supply-chain bleeding-- ahead of the holiday season, despite continued logistical snarls. People may have to be flexible on the exact gifts they pick out for friends and family. But they'll likely have options.
"We built up inventories, which is a really good thing, because while the matching of goods provided and [the goods] demanded is unlikely to be perfect this holiday season, it suggests there will be some things on the shelves to buy in the fourth quarter," Hunter, of KPMG, said.
Chad Moutray, chief economist of the National Association of Manufacturers said he expects the economy to grow 4% in the fourth quarter and 5.5% for all of 2021 as demand remains "super strong."
"You still have supply chain issues - those are not going to get solved in the fourth quarter. You still have labor shortages," Moutray said. "But in general, you talk to most manufacturers and they're going to tell you sales are pretty strong."
Overall, the report showed strong signs of an economy returning to 2019-style spending patterns, with more spending on services and experiences like hair salons and travel, and fewer purchases of goods such as new cars, outdoor fire pits and washing machines.
When the coronavirus hit, consumers slashed about half of their spending on transportation services, such air travel, ride-share and trains, but the sector is now well on the way to recovery. Almost half of the respondents to a recent Conference Board survey said they planned to travel in the coming six months - the highest level since the pandemic began.
Spending on services like Southwest Airlines, Lyft and Amtrak soared 9% in the quarter, even as people ended their pandemic-era spending binge on transportation-related goods such as motor vehicles and parts.
In Chicago, Sophie Limo Black Car Services fought to stay in business in 2020 as phones rang off the hook with cancellations. Cristian Chifor, one of the company's account managers, said bookings have picked back up over the past few months, mostly with people booking rides for a social night out.
But there's a long way to go: Corporate accounts haven't come back. Chifor said the delta variant of the coronavirus held back some business travel that might otherwise have returned. He is also pinched on the other end, as he barely has enough drivers to meet the modest demand, since so many workers left the industry or have yet to return to their old jobs.
"Hopefully things will get better, meaning that some of the drivers will come back, because we cannot survive like this either," Chifor said. "There's a lot of angry customers because prices are going up, and we have to limit our business to how much we can do, literally."
Published : October 29, 2021
By : The Washington Post