Delta, Shortages Bite in 3Q
By Diane Swonk, chief economist, Grant Thornton
The economy rose at a 2% pace in the third quarter, a figure that would have been considered good pre-pandemic but marks a sharp slowdown from the 6.7% pace of the second quarter. The Delta variant flared, cases surged and supply chain bottlenecks worsened. Consumer spending was hit hardest, slowing to a 1.6% pace; that’s less than a quarter of the torrid 12% pace of the second quarter.
Shortages, price hikes and a slowdown in employment gains, notably in the service sector, took a toll on spending in the third quarter. A sharp drop in spending on big-ticket items – vehicles, appliances and furniture – was partially offset by continued but slower gains in spending on services, which surprised to the upside. The more than $2.4 trillion in savings we amassed earlier in the pandemic helped keep spending going but looks on track to be depleted, especially across low- and middle-income households by year-end.
The good news is that credit card usage suggests those trends reversed as the Delta wave abated in October. Halloween is the second largest spending holiday of the year for most consumers and if my neighborhood is any indication, we will be slammed by trick-or-treaters after the pandemic-induced calm of last year. Spending on travel and leisure is expected to soar during the holiday season, although we will be watching the Delta plus variant that has caused a surge in cases in the UK.
Housing was a drag on growth for the second quarter in a row, mostly because of supply shortages. The subprime crisis triggered widespread consolidation in the housing market, which compounded the shortfall in both existing and new homes for sales that occurred when the pent-up demand triggered by the pandemic was unleashed.
Supply constraints extend to rental properties. Surging prices have already crowded out many first-time buyers and supported the development of rental properties. Build-to-rent single-family home projects have picked up over the last year, notably in Florida.
Business investment edged only slightly higher as companies redeployed cash reserves to attempt to ramp up and embrace new technologies. Shortages remain the primary hurdle. The pandemic has triggered the most robust investment boom in equipment and intellectual property since WW-II. This is ushering in large productivity gains, which could have some legs as we saw in the wake of the leapfrog investments made to head off disruptions associated with the change in the calendar to the year 2000, also known as Y2K. (Google it if you don’t know what that means; I am getting old enough to teach some parts of history.)
