The US economy was weaker than expected in the third quarter, which is bad news for any American whose livelihood depends on strong economic growth and especially disappointing for the White House, which struggles to reassure voters on the state of the economy in a context of rising prices and a historic supply crisis.
Overall growth in the third quarter was 2%, down sharply from the rates of 4.5% and 6.7% recorded by the US economy in the first and second quarters.
On closer inspection, however, the report looks a lot better.
For starters, the federal government’s most comprehensive measure of demand across the economy, known as final sales to domestic buyers, grew by about 6.6%. Notably, it is almost perfectly on track with the pre-pandemic trend. This measure, unlike the overall GDP figure, is not corrected for inflation. So this indicates that businesses, consumers and government spent more, but took away less goods and services due to the higher prices.
Moreover, the lion’s share of the decline in actual purchases is right where it would be expected: the auto sector. Lower sales of motor vehicles and parts alone slashed gross domestic product by 2.7 percentage points. This suggests that in the absence of the chip shortage that continues to plague the auto industry, the economy would have recorded 4.7% annual growth in the third quarter – roughly in line with its earlier pace. This year.
At the same time, household consumption of services continued to rebound, adding 3.6 points to real GDP, compared to 2.1 and 5.4 in the first two quarters of the year. This suggests that the economy continues to rebalance after last winter and spring shutdowns, which caused a collapse in the service sector and a corresponding explosion in the consumption of goods.
Perhaps most importantly, the compensation of employees of private companies rose 9.2%, far outpacing the rise in inflation. Remarkably, the compensation is slightly above its pre-pandemic trend. As long as this is the case, the growth outlook will remain positive.
Finally, producer inventories continued to decline, as they did throughout the year, indicating that pent-up demand is building up among both businesses and consumers. This factor will help propel economic growth next year and beyond.
Yes, real GDP growth slowed considerably in the third quarter. But the difference is largely explained by the tightening of supply in automobiles. At the same time, consumers and businesses are rebalancing from goods to services, causing bottlenecks in the supply chain. As soon as these are eliminated, the US economy will be ready to return to higher growth.