Post from First Trust Economics Blog

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

Oct 25th, 2021

Keynesianism can temporarily giveth, but ultimately

always taketh away…and then some.

When the US fell into the COVID crisis, the federal

government went on a massive spending binge. Pre-COVID, in

the twelve months through March 2020, federal outlays were

$4.6 trillion, or 21.4% of GDP. In the next twelve months

outlays soared to $7.6 trillion, or 36.2% of GDP. Outside of

wartime, we know of no other time when the government has

ramped up spending that much or that fast. As a result, as well

as very easy money, the economy partially bounced back faster

than it would have in the absence of the extra spending.

But the extra spending was like an opioid given to a car

crash victim, temporarily masking the economic pain caused by

government-imposed shutdowns. Ultimately, there is no free

lunch when it comes to spending, and the economic bill is already

starting to come due.

As recently as early August, the consensus among

economists was that real GDP would grow at about a 7% annual

rate in the third quarter, even faster than it grew in the first half

of the year when the government was passing out checks like it

was going out of style. Now, as we set out below, we’re

estimating that the economy grew at only about a 2% rate.

Consumption: Car and light truck sales fell at a 61.6%

annual rate in Q3, largely due to supply-chain issues, while “real”

(inflation-adjusted) retail sales outside the auto sector were

roughly unchanged. The good news is that although we only

have reports on spending on services through August, it looks

like real services spending should be up at a solid rate. Putting it

all together, we estimate real consumer spending on goods and

services, combined, increased at a tepid 0.9% annual rate, adding

only 0.6 points to the real GDP growth rate (0.9 times the

consumption share of GDP, which is 69%, equals 0.6).

Business Investment: The third quarter should continue

growth led by investment in business equipment. Investment in

intellectual property should also gain, as usual, but commercial

construction should be down for the quarter. Combined,

business investment looks like it grew at an 3.8% annual rate,

which would add 0.5 points to real GDP growth. (3.8 times the

13% business investment share of GDP equals 0.5).

Home Building: Residential construction looks like it

slowed slightly in the third quarter. That’s not due to less demand

– sales are trending higher and inventories remain very low – but

instead reflects supply-chain issues and lingering problems

getting people to work, given unusually high jobless benefits that

only ran out nationally late in the third quarter. We estimate a

contraction at a 2.1% annual rate in Q3, which would subtract

0.1 point from real GDP growth. (-2.1 times the 5% residential

construction share of GDP equals -0.1).

Government: It’s hard to translate government spending

into GDP; only direct government purchases of goods and

services (and not transfer payments like extra unemployment

insurance benefits) count when calculating GDP. We estimate

federal purchases grew at a 0.6% annual rate in Q3, which would

add 0.1 point to real GDP growth. (0.6 times the 18%

government purchase share of GDP equals 0.1).

Trade: A faster economic recovery in the US earlier this

year as well as the labor shortage have spurred a rapid recovery

in imports, which are at an all-time high. At present, we’re

projecting that the surge in imports relative to exports will

subtract 1.3 points from real GDP growth in Q3.

Inventories: Inventories look like they fell again in Q3 as

businesses with supply-chain issues keep having to dip into

inventories to meet demand. However, inventories didn’t fall as

rapidly as they did in Q2, and in the arcane world of GDP

accounting, that means inventories will make a positive

contribution to growth, which we are estimating at 2.2 points.

Add it all up, and we get 2.0% annualized real GDP growth

for the third quarter, nowhere close to the “sugar high” 6.5%

annual rate of growth in the first half of the year.