Updated: Nov 2, 2021
Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Gross domestic product (GDP), which measures the total value of goods and services produced in the U.S., rose at just a 2.0% annual rate in the third quarter. This was the economy’s slowest rate of growth since the recovery began a year ago. GDP had risen at a 6.5% annual rate in the first six months of 2021, so this is very disappointing news.
Three things muted economic growth last quarter:
1. The Delta variant of COVID-19 2. Continuing supply-chain problems 3. Fading government stimulus
These factors limited growth in consumer spending—the biggest part of GDP—to just 1.6% after it grew 12% in 2Q21, and 11.4% in 1Q21. The increasing scarcity of goods due to manufacturing and shipping problems has pushed inflation to levels not seen in 30 years. Add in the end of many government stimulus programs, and it’s no surprise the growth in consumer spending was weak last quarter.
What happens now?
Yesterday, President Biden announced a scaled-down $1.75 trillion spending bill in an effort to get something passed quickly. It’s unclear if he has the votes to do this, but I expect him to use this weak GDP number as ammunition to get a deal done.
Many economists are predicting that economic growth will rise in the fourth quarter—to between 4-5%—as the Delta variant fades and supply-chain issues start to go away. They also expect hiring to pick up, as the expiration of federal unemployment benefits pushes many to finally re-enter the workforce.
That all sounds reasonable, but one problem that’s not going away any time soon is inflation. Even after the supply issues are fixed, the money supply will still be 35% higher than it was before the pandemic. Pumping another $1.75 trillion into the economy will only push prices higher. Remember, inflation is already rising faster than wages right now, so the "real" income of Americans is falling.
Jobless Claims Fall to a Pandemic-Era Low
Initial claims for unemployment fell by 10,000 the week of October 18th to 281,000, their lowest level since mid-March 2020. That may not seem very exciting, but claims are getting closer to where they were before the pandemic. In 2019, initial claims for unemployment averaged 218,019 per week. If claims continue to fall by this much every week, we could be down near 218,000 by the end of this year.