• Slowing Economy

    Slowing Economy Brings the Third Quarter to a Close

    Slowing Economy Brings the Third Quarter to a Close

    Labor shortages, supply-chain disruptions, severe weather conditions and a rise in COVID cases during the summer each weighed on economic output recently. The economy grew by 2.0% annualized in the third quarter of 2021, according to the advance estimate released by the Bureau of Economic Analysis last week — a pandemic-era low and sharply slower than economist expectations from earlier in the year.

    Among the major categories, the most notable change came in personal consumption, which contributed a mere 1.1 percentage point to growth in the third quarter of 2021 compared to its 7.9 percentage point boost to growth in the second quarter. Within the overall anemic response of consumers, the composition of spending shifted away from purchases of goods such as furniture, automobiles and home exercise equipment, which fell by 9.2% in the third quarter (on an annualized basis) and shaved 2.3 percentage points from real gross domestic product growth, toward services such as traveling and dining out, which rose by 7.9% and contributed 3.4 percentage points.

    The nation’s growing trade deficit also weighed on economic output. Net exports were a drag to real GDP growth of -1.1 percentage points in the third quarter of 2021, far more than the -0.2 percentage points the prior quarter. Despite the pullback in consumer spending compared to the second quarter, the U.S. economy is faring better than that of our trading partners and imports should continue to outpace exports given slower economic growth abroad.

    Investment masked an otherwise bleak GDP report, but underlying details still show a dismal situation. Private domestic investment contributed 1.9 percentage points to real GDP growth in the third quarter of 2021, but that came almost entirely from a change in private inventories. Inventories fell by an annualized rate of $77.7 billion in the third quarter of 2021, compared to a $168.5 billion decline in the previous quarter. A fall in the pace of the change in inventories generates a positive impact on real GDP growth. In other words, businesses depleting their inventories at a slower rate means that they’re investing more on future production relative to the previous period. This generally occurs near the end of a recession as firms turn more optimistic about future economic conditions. Apart from the second half of 2020, when real private inventories ticked up, inventories have been on a downward trend since the fourth quarter of 2019. Similarly, inventories fell for eight consecutive quarters during the great financial crisis and for five consecutive quarters during the early 2000s recession.


    Expectations are for improved economic growth in the fourth quarter as the delta variant recedes and consumers return to higher levels of spending, but the havoc that the pandemic wreaked on supply chains and labor supply may continue for months to come.

    The Income and Consumption Paradox

    In a separate report, the BEA released its Personal Income and Outlays report for September last week that showed a 1% monthly decline in personal income at the same time as a 0.6% monthly gain in personal consumption expenditures. Since the onset of COVID, households have generally been cautious with extra income received through relief measures, storing much of those funds away in savings accounts. Consumer spending didn’t return to pre-pandemic levels until January 2021.

    The end of enhanced unemployment benefits was to some extent offset by an increase in compensation. Income through wages and salaries grew by 0.7% in September as some workers return to jobs in a competitive labor market exhibiting strong wage gains in some sectors. However, income received through other transfers to households, which include child tax credits, Social Security, Medicare and Medicaid payments, remain elevated relative to pre-COVID levels.

    While consumers have generally been shifting towards service, higher prices at the fuel pump and at grocery stores led to stronger growth in spending in nominal terms on nondurable goods in September. A significant shortage of new automobiles, meanwhile, has thwarted durable goods consumption. In contrast, most major services categories saw higher levels of spending, including recreation services, bars and restaurants, and hotels.


    End to Excess Savings Could Bring Relief to Soaring Home Prices

    With personal spending outpacing personal income, the savings rate fell to 7.5% in the third quarter, reaching levels more typical of pre-COVID days. Households have accumulated what is estimated to be about $2.5 trillion in excess savings during the pandemic, after three waves of fiscal stimulus measures sent trillions of dollars to households that had limited opportunity to spend during shutdowns.

    Extra savings have contributed to rising asset prices, including home prices. Now with more widespread reopening of activity, households are expected to spend some of their bundles of cash over the next few quarters, a supposition that is the basis of rosy economic forecasts.

    One consequence of higher levels of spending is that savings will be depleted over time, which could affect the ability of prospective homebuyers to scrape up hefty down payments. With affordability already waning, this could be one more factor putting the brakes on rising home prices in coming months.

    More on the Housing Market

    Following our discussion last week on the state of the housing market in September, data on pending home sales released by the National Association of Realtors showed a fall-off of new contract signings in September, as expected, with all regions seeing a pullback in pending sales. Despite still strong demand for housing, limited inventories and higher prices are tempering the ability of buyers to secure a deal. To underscore that reasoning, CoreLogic released its Home Price Index on Tuesday, showing another pop in housing prices of 18% over the year in September.

    Construction spending also dipped lower in September, according to the Census Bureau , falling by 0.5%, but July and August numbers were revised higher. The fall was due to a drop in residential construction spending, with all segments — including single-family homes, multifamily units, and home renovations — falling. Residential construction spending is 26.4% over pre-COVID levels. Nonresidential spending also fell and is now 12.3% below its February 2020 level. Both nonresidential and residential spending had been expected to rise in the month, but shortages of labor and higher prices of materials appear to be causing weaker spending.

    What We’re Watching …

    The Federal Reserve’s open market committee is meeting this week, with Chairman Jerome Powell holding his post-meeting press conference on Wednesday. As central banks around the world turn more hawkish amid concerns over higher inflation, investors are betting that the U.S. will follow suit. Last week’s action in the U.S. bond market indicated that investors believe that the Fed will raise its policy rate earlier and faster than the committee has steadfastly maintained, and that asset purchases will be trimmed more quickly as well.

    The October jobs report is scheduled to be released on Friday. After two months of disappointing job gains, expect October to show a marked acceleration as the delta variant receded and economic activity returned in many sectors. Analysts expect an average of 425,000 jobs to be added the month and the unemployment rate to edge lower as COVID fears diminish and strong wage gains in some sectors attract workers to the millions of available open positions.

    CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.

    Source: CoStar Group, www.costar.com