- In the third quarter, the US economy grew at a 2% annualized rate, the weakest pace since the conclusion of the recession in 2020.
- Consumer expenditure and residential investment slowed, helping to keep the number low.
- Last week, weekly unemployment claims fell higher than expected to a new pandemic-era low of 281,000, falling short of the 289,000 forecast.
Why has the economy’s growth slowed?
In the third quarter, the US economy slowed significantly due to a slew of challenges, including an increase in COVID-19 cases, supply chain bottlenecks, rising consumer costs, and the fading impacts of fiscal stimulus measures.
However, with COVID-19 cases on the decline and vaccinations on the rise, most economists see the disappointing showing as a blip in an otherwise strong recovery from the pandemic-induced recession, with a big rebound expected in the latter months of the year.
According to the Commerce Department, the nation’s gross domestic product, or the value of all goods and services produced in the United States, expanded at a seasonally adjusted annual rate of 2% in the July-September period. Bloomberg polled economists, who predicted a 2.8 percent increase in GDP.
Both consumer spending and business investment have slowed significantly. Companies that merely drew down their stockpiles more slowly or replenished them after supply concerns caused them to deplete stocks the previous quarter accounted for a large portion of the GDP increase.
The 2% increase in activity would have been considered a strong showing for an economy that had been increasing at little over 2% per year on average in the decade before to the epidemic. However, after the economy shrank by 3.4 percent in 2020, soaring vaccinations and $2.5 trillion in excess household savings thanks to stimulus cheques and budget cuts last year have set the stage for a historic uptick this year. In the first and second quarters, the GDP increased by 6.3 percent and 6.7 percent, respectively.
However, the coronavirus delta form caused a jump in occurrences in the third quarter, prompting many customers to hunker down or limit their restaurant visits, travel, and other activities. As semiconductor shortages continued to stymie auto production, vehicle purchases plummeted.
Consumer expenditure, which accounts for 70% of economic activity, increased by only 1.6 percent after rises of 11.4 percent and 14% in the previous two quarters.
Yearlong supply snarls persisted or worsened, leaving many store shelves empty or low on popular products due to pandemic-related shortages of truck drivers, factory and warehouse workers, which hampered deliveries. In September, the snafus pushed annual inflation to 5.4 percent, tying a 13-year high and frightening many buyers.
Meanwhile, the impact of federal relief packages that included large stimulus payments for homeowners and small business aid over the winter is fading.
Even Hurricane Ida, which hit Louisiana in late August and knocked out electricity and slowed the manufacture of chemicals and energy-related products, played a part, according to Barclays.
According to the Centers for Disease Control and Prevention, coronavirus infections have dropped to less than half of their previous peak of more than 170,000 a day in mid-September, and 67.3 percent of Americans over the age of 12 have been properly vaccinated. According to Barclays, retail sales have already increased as a result of the improving health situation, climbing 0.7 percent in September.
According to economists polled by Blue Chip Economic Indicators, the economy will increase 5.3 percent in the fourth quarter as holiday spending picks up despite supply constraints, and 5.7 percent this year, the fastest pace since 1984.
In a note to clients, TD Economics analyst Leslie Preston stated, “The slowdown in growth… is likely to prove a one-off.”
Why is the rate of US GDP growth slowing?
The fast-spreading Delta strain of coronavirus reduced consumer spending in the third quarter of the year, causing the US economy to slump dramatically. It occurred at a time when the United States was dealing with supply chain challenges, increased inflation, and new Covid limits in some areas.
What factors limit economic expansion?
Economic Growth is Limited by Six Factors
- Poor health and a lack of education are two major issues. The productivity of people who do not have access to healthcare or education is lower.
What causes the GDP to fall?
Shifts in demand, rising interest rates, government expenditure cuts, and other factors can cause a country’s real GDP to fall. It’s critical for you to understand how this figure changes over time as a business owner so you can alter your sales methods accordingly.
What is causing the economy to slow?
Because consumer spending accounts for the majority of the economy, any decrease in growth drives down overall growth. Consumer expenditure increased by 1.6 percent in the third quarter, down from 12.0 percent in the previous quarter. During the pandemic’s recovery, this was also the slowest rate of rise. Consumer expenditure on services such as dining out and recreational activities such as sports increased by 7.9% in the second quarter of 2021, down from 11.5 percent in the previous quarter. Restaurants and hotels, which grew by a remarkable 12.4 percent in the second quarter, down from a whopping 68.0 percent in the previous quarter, and recreation services, which grew by a strong 16.5 percent from July to September 2021, down from 41.3 percent in the previous quarter, both experienced significant slowdowns. The drop in consumer demand is partly due to an increase in coronavirus cases linked to the more transmissible Delta strain during the summer months. It’s also likely a return to more typical consumer spending after customers splurged on these services in the spring, when coronavirus incidences were at an all-time low.
Consumer purchasing is being hampered more by supply chain bottlenecks than by fears of a spreading pandemic. In the third quarter, consumer expenditure on durable goods such as vehicles and furniture declined by 26.2 percent, compared to a 13.0 percent gain in the second quarter. Cars and car parts (-53.9 percent), as well as furniture and other household items such as refrigerators, also saw significant drops (-10.3 percent ). Due to worldwide supply chain delays, including chip shortages, many were unable to purchase large-ticket items.
What caused the economy to grow in 2021?
As the economy continues to recover from the ravages of the COVID-19 pandemic, US GDP growth surged in the fourth quarter, expanding at a 6.9% annual rate, up from the preceding four quarters’ rate of growth. Increased inventory investment and increased service consumption accounted for all of GDP growth in the fourth quarter. Real GDP increased by 5.5 percent in the first four quarters of 2021, the fastest rate since 1984.
In the fourth quarter, the economy was most likely producing at or near its full potential. The economy was still trending 1.4 percent below pre-pandemic levels. Even if the pandemic had not occurred, the economy is unlikely to have continued to develop at the same rate in 2020 and 2021 as it had in previous years. Prior to the pandemic, forecasters projected a slowdown since the economy was close to or at maximum employment, making it improbable that job gains would continue at the same rate. Furthermore, because of higher fatalities and limited immigration, which resulted in a smaller-than-expected labor force, and low investment, which resulted in a smaller-than-expected capital stock, the pandemic itself has certainly diminished potential.
Even while the economy was near to where it would have been had the epidemic and the government’s response not occurred, the economy’s makeup was drastically changed. On the supply side, employment remained low (because to low labor force participation), but this was compensated for by longer average hours and improved productivity. Final expenditures were biased towards commodities and residential investment, rather than services, business fixed investment, inventories, and net exports, on the demand side. In the fourth quarter, the demand side began to take on a more regular composition, but it remained highly skewed.
Why did the GDP rise in 2021?
Retail and wholesale trade industries led the increase in private inventory investment. The largest contributor to retail was inventory investment by automobile dealers. Increases in both products and services contributed to the increase in exports. Consumer products, industrial supplies and materials, and foods, feeds, and beverages were the biggest contributions to the growth in goods exports. Travel was the driving force behind the increase in service exports. The rise in PCE was mostly due to an increase in services, with health care, recreation, and transportation accounting for the majority of the increase. The increase in nonresidential fixed investment was mostly due to a rise in intellectual property items, which was partially offset by a drop in structures.
The reduction in federal spending was mostly due to lower defense spending on intermediate goods and services. State and local government spending fell as a result of lower consumption (driven by state and local government employee remuneration, particularly education) and gross investment (led by new educational structures). The rise in imports was mostly due to a rise in goods (led by non-food and non-automotive consumer goods, as well as capital goods).
After gaining 2.3 percent in the third quarter, real GDP increased by 6.9% in the fourth quarter. The fourth-quarter increase in real GDP was primarily due to an increase in exports, as well as increases in private inventory investment and PCE, as well as smaller decreases in residential fixed investment and federal government spending, which were partially offset by a decrease in state and local government spending. Imports have increased.
In the fourth quarter, current dollar GDP climbed 14.3% on an annual basis, or $790.1 billion, to $23.99 trillion. GDP climbed by 8.4%, or $461.3 billion, in the third quarter (table 1 and table 3).
In the fourth quarter, the price index for gross domestic purchases climbed 6.9%, compared to 5.6 percent in the third quarter (table 4). The PCE price index climbed by 6.5 percent, compared to a 5.3 percent gain in the previous quarter. The PCE price index grew 4.9 percent excluding food and energy expenses, compared to 4.6 percent overall.
Personal Income
In the fourth quarter, current-dollar personal income climbed by $106.3 billion, compared to $127.9 billion in the third quarter. Increases in compensation (driven by private earnings and salaries), personal income receipts on assets, and rental income partially offset a decline in personal current transfer receipts (particularly, government social assistance) (table 8). Following the end of pandemic-related unemployment programs, the fall in government social benefits was more than offset by a decrease in unemployment insurance.
In the fourth quarter, disposable personal income grew $14.1 billion, or 0.3 percent, compared to $36.7 billion, or 0.8 percent, in the third quarter. Real disposable personal income fell 5.8%, compared to a 4.3 percent drop in the previous quarter.
In the fourth quarter, personal savings totaled $1.34 trillion, compared to $1.72 trillion in the third quarter. In the fourth quarter, the personal saving rate (savings as a percentage of disposable personal income) was 7.4 percent, down from 9.5 percent in the third quarter.
GDP for 2021
In 2021, real GDP climbed 5.7 percent (from the 2020 annual level to the 2021 annual level), compared to a 3.4 percent fall in 2020. (table 1). In 2021, all major subcomponents of real GDP increased, led by PCE, nonresidential fixed investment, exports, residential fixed investment, and private inventory investment. Imports have risen (table 2).
PCE increased as both products and services increased in value. “Other” nondurable items (including games and toys as well as medications), apparel and footwear, and recreational goods and automobiles were the major contributors within goods. Food services and accommodations, as well as health care, were the most significant contributors to services. Increases in equipment (dominated by information processing equipment) and intellectual property items (driven by software as well as research and development) partially offset a reduction in structures in nonresidential fixed investment (widespread across most categories). The rise in exports was due to an increase in products (mostly non-automotive capital goods), which was somewhat offset by a drop in services (led by travel as well as royalties and license fees). The increase in residential fixed investment was primarily due to the development of new single-family homes. An increase in wholesale commerce led to an increase in private inventory investment (mainly in durable goods industries).
In 2021, current-dollar GDP expanded by 10.0 percent, or $2.10 trillion, to $22.99 trillion, compared to 2.2 percent, or $478.9 billion, in 2020. (tables 1 and 3).
In 2021, the price index for gross domestic purchases climbed by 3.9 percent, compared to 1.2 percent in 2020. (table 4). Similarly, the PCE price index grew 3.9 percent, compared to 1.2 percent in the previous quarter. The PCE price index climbed 3.3 percent excluding food and energy expenses, compared to 1.4 percent overall.
Real GDP rose 5.5 percent from the fourth quarter of 2020 to the fourth quarter of 2021 (table 6), compared to a 2.3 percent fall from the fourth quarter of 2019 to the fourth quarter of 2020.
From the fourth quarter of 2020 to the fourth quarter of 2021, the price index for gross domestic purchases grew 5.5 percent, compared to 1.4 percent from the fourth quarter of 2019 to the fourth quarter of 2020. The PCE price index climbed by 5.5 percent, compared to 1.2 percent for the year. The PCE price index increased 4.6 percent excluding food and energy, compared to 1.4 percent overall.
Source Data for the Advance Estimate
A Technical Note that is issued with the news release on BEA’s website contains information on the source data and major assumptions utilized in the advance estimate. Each version comes with a thorough “Key Source Data and Assumptions” file. Refer to the “Additional Details” section below for information on GDP updates.
What impact does GDP have on the economy?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
What happens if the economy slows down?
The entire cash worth of all products and services produced over a given time period is referred to as GDP. In a nutshell, it’s all that people and corporations generate, including worker salaries.
The Bureau of Economic Analysis, which is part of the Department of Commerce, calculates and releases GDP figures every quarter. The BEA frequently revises projections, either up or down, when new data becomes available throughout the course of the quarter. (I’ll go into more detail about this later.)
GDP is often measured in comparison to the prior quarter or year. For example, if the economy grew by 3% in the second quarter, that indicates the economy grew by 3% in the first quarter.
The computation of GDP can be done in one of two ways: by adding up what everyone made in a year, or by adding up what everyone spent in a year. Both measures should result in a total that is close to the same.
The income method is calculated by summing total employee remuneration, gross profits for incorporated and non-incorporated businesses, and taxes, minus any government subsidies.
Total consumption, investment, government spending, and net exports are added together in the expenditure method, which is more commonly employed by the BEA.
This may sound a little complicated, but nominal GDP does not account for inflation, but real GDP does. However, this distinction is critical since it explains why some GDP numbers are changed.
Nominal GDP calculates the value of output in a particular quarter or year based on current prices. However, inflation can raise the general level of prices, resulting in an increase in nominal GDP even if the volume of goods and services produced remains unchanged. However, the increase in prices will not be reflected in the nominal GDP estimates. This is when real GDP enters the picture.
The BEA will measure the value of goods and services adjusted for inflation over a quarter or yearlong period. This is GDP in real terms. “Real GDP” is commonly used to measure year-over-year GDP growth since it provides a more accurate picture of the economy.
When the economy is doing well, unemployment is usually low, and wages rise as firms seek more workers to fulfill the increased demand.
If the rate of GDP growth accelerates too quickly, the Federal Reserve may raise interest rates to slow inflationthe rise in the price of goods and services. This could result in higher interest rates on vehicle and housing loans. The cost of borrowing for expansion and hiring would also be on the rise for businesses.
If GDP slows or falls below a certain level, it might raise fears of a recession, which can result in layoffs, unemployment, and a drop in business revenues and consumer expenditure.
The GDP data can also be used to determine which economic sectors are expanding and which are contracting. It can also assist workers in obtaining training in expanding industries.
Investors monitor GDP growth to see if the economy is fast changing and alter their asset allocation accordingly. In most cases, a bad economy equals reduced profits for businesses, which means lower stock prices for some.
The GDP can assist people decide whether to invest in a mutual fund or stock that focuses on health care, which is expanding, versus a fund or stock that focuses on technology, which is slowing down, according to the GDP.
Investors can also examine GDP growth rates to determine where the best foreign investment possibilities are. The majority of investors choose to invest in companies that are based in fast-growing countries.
Why do we want the economy to expand?
The majority of things do not continue to expand indefinitely. If a person grew at the same rate throughout his life, he would become enormous and possibly die (or else rule the world). Despite this, the majority of economists agree that the economy must always grow. And at a rapid pace, for the country’s and people’s benefit.
According to conventional wisdom, GDP growth, which counts the value of goods and services generated in an economy each year, is critical to a country’s stability and prosperity. Economists claim that growth is the reason why each generation is better off than its parents’ generation. “More growth is better, period,” Northwestern economist Robert Gordon told me.
However, some economists are now questioning this viewpoint, claiming that it is more sensible to focus on well-being indicators rather than growth.
After all, despite a three percent annual growth rate over the last 60 years (which is fairly strong), 43 million Americans remain in poverty, and most people’s earnings have remained practically flat since the Reagan administration ended. In reality, despite positive economic growth in all but two of the years since 2000, households’ median income in 2014 was 4% lower than it was in 2000. For more than a half-century, developed countries have concentrated on how to make their economies expand faster in the hopes of improving the lives of their entire people. But what if expansion isn’t the only way to improve a society’s level of living?
“Many of us believe that a multi-dimensional approach that catches what people care about would be beneficial,” Michael Spence, a Nobel Laureate and emeritus professor at Stanford, told me. “Many elements are missing from growth: health, distributional features of growth patterns, a sense of security, many sorts of freedoms, leisure generally defined, and more.”
Spence and his supporters aren’t advocating for the economy to cease growing or even shrink (though there is a group of people who do believe that). Instead, they argue that it may be healthier for the economy to accept a slower but still good growth rate while focusing on policies that address issues like inequality and access to services. This proposal is, perhaps, a bit idealistic, but giving it serious thought can reveal the flaws in the present growth-first strategy.
It’s not only that maximizing growth doesn’t always benefit people; it’s also that rapid growth can have unintended consequences, such as when the pursuit of growth is used to push through policies that are intended to boost GDP but may harm millions of people. Companies frequently claim that fewer rules would allow them to grow faster and produce more, yet reducing laws could lead to increased pollution and factory accidents. Other times, initiatives that may be required for the country’s long-term existence are disregarded for fear of harming GDP. Conservatives, for example, oppose climate agreements because they claim that reducing greenhouse gas emissions will diminish GDP by trillions of dollars. “According to Peter Victor, an economist and environmental scientist at York University in Toronto, “the pursuit of expansion can be rather harmful.”
Victor, Spence, and other economists have begun to consider the implications of a society that does not prioritize growth. They claim that a country can survive even if its growth is modest. Instead, a government may focus on making its citizens secure and happy, and pursue policies to accomplish that aim. This could entail assisting individuals in working less hours, consuming fewer resources, or spending more time with their family. They claim that such a country would be a better place for everyone.