Slower Growth in Q3
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.