U.S. Economy Poised to Reaccelerate

Growth is set to return to higher rates after slowing in the third quarter, as supply shortages ease, and inventories are restocked. But weakened consumer sentiment bears watching.

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As expected, U.S. economic growth slowed in the third quarter after running at a strong pace since the end of 2020. We expect growth to strengthen once again to close out the year—but data pointing to weakening consumer confidence may provide a potential headwind.

A Bureau of Labor Statistics report released on October 28 showed that U.S. GDP growth slowed to an annualized rate of 2.0% in the 2021 third quarter from an average of 5.8% in Q4 2020–Q2 2021. Positive growth was salvaged by a large contribution from inventory change even as final demand was stagnant. That composition of growth would normally be considered unsustainable for very long, but inventories have been liquidated so dramatically, and involuntarily, that there is still plenty of room for positive inventory change to contribute to growth in upcoming quarters.

Highlights of the GDP report included:

• Consumer spending, the standout driving force behind the recovery, grew only 1.6% on a seasonally adjusted basis as a large increase in spending on services coincided with a sharp drop in purchases of motor vehicles and other durables.
• Nonresidential fixed investment rose by a seasonally adjusted 1.8%, as weak spending on equipment and nonresidential construction was entirely offset by ongoing strength in spending on intellectual property, which includes corporate R&D expenditures. Weak residential construction, due to poor weather and declining spending on renovation, belied the underlying strength in housing demand.
• Ongoing weakness in exports and a surge in imports of services (travel and transportation) caused net exports to reduce GDP growth by 1.3%, in line with the average drag over the past year.
• Government spending continued increasing anemically, as a sharp decline in federal purchases of goods and services was offset by rising spending by states and localities.

Looking Ahead

The U.S. economy should be expected to accelerate sharply following the lull in GDP growth during the third quarter, as supply shortages ease, and strong demand is reflected in accelerating consumer spending, fixed investment, residential construction, and government spending. Moreover, U.S. exports should pick up sharply, as demand improves in key trading partner economies, and global travel resumes. An added kicker from inventory restocking should be enough to propel GDP back into a series of above-trend-growth quarters, starting with Q4 2021.

However, there is a potentially countervailing factor that we will be watching. Recent declines in the weekly Bloomberg consumer confidence index hint at a bifurcation in the consumer spending recovery. While generous income support programs lifted spending for households at all income levels during the early months of economic recovery, the termination of the transfers—supplemental unemployment insurance ended in early September, and other measures expired earlier in 2021—coincided with declining consumer confidence and less robust consumer spending. Rising gasoline prices have gone hand in hand with an erosion in buying plan.

While falling consumer confidence and a lower trajectory for the recovery in consumer spending are not enough to derail reflation in the broader economy, it suggests that fiscal support for lower income households may have been removed too early. If so, this may potentially constrain the recovery even as more powerful cyclical drivers—pent-up demand for durable goods and housing, and inventory restocking—keep it on track for above-trend growth through mid-2022.

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