Economic Growth Slows to 2% in Third Quarter

Delta Variant Puts Wrench in GDP Growth

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Growth in the U.S. economy slowed dramatically in the third quarter as numerous factors—including the fast-spreading delta variant of the coronavirus, price hikes, supply shortages, and less government aid—reduced consumers’ spending on cars, furnishings, and other items. 

Key Takeaways

  • Economic growth decelerated to 2% in the third quarter from 6.7% in the second quarter, marking the slowest growth in the pandemic-era recovery.
  • Headwinds including a spike in COVID-19 cases, inflation, and a scarcity of supplies slowed the pace of consumer spending considerably. 
  • The 2% GDP growth was less than most economists had forecast, even after lowering their estimates throughout the quarter.
  • Many economists expect a rebound in the fourth quarter. Still, risks remain, especially if families are in no mood to spend this holiday.
  • A slowing economy is especially worrisome when inflation is high because the Federal Reserve’s normal methods of controlling inflation can cool economic growth.

Real gross domestic product (GDP) grew at an annualized rate of 2% in the July-to-September quarter, decelerating from 6.7% in the second quarter and 6.3% in the first quarter and marking the slowest growth of the pandemic recovery, according to data released Thursday by the Bureau of Economic Analysis. It was even lower than the average quarterly growth of 3.1% seen between 1947 and 2020.

Growth was weaker than many economists expected (the median forecast cited by Moody’s Analytics was 2.8%, even though they’d continued to lower their estimates as new reasons for pessimism emerged. In July, many economists had forecast growth of 6%—some even 8.8%— but the delta variant changed people’s plans over the summer, supply chain bottlenecks worsened, and high inflation rates persisted.

“The Delta wave of the pandemic, which began in late June, has done meaningful damage to the economic recovery,” wrote Scott Hoyt, senior director at Moody’s Analytics, which dropped its forecast to 1.4% from nearly 6% at the start of the quarter. 

Consumer spending rose 1.6%, a sharp deceleration from the 12% growth in the second quarter. Spending on goods, including big-ticket items like cars, appliances, and furniture, dropped 9.2%. People bought fewer vehicles and auto parts, for instance, amid a shortage of the semiconductors used to make them. That was offset by a 7.9% gain in spending on services (which includes things like hotel rooms, dining out, and recreation), though that too was weaker than in the second quarter, decelerating from an 11.5% growth rate.

A Rebound Ahead?

Many economists say the slower growth is only a blip, and are optimistic now that the summer spike in daily COVID-19 case counts has passed.

“We are confident that the fourth quarter will be much better,” James Knightly, chief international economist at ING, wrote in a commentary.

As the delta wave of COVID-19 recedes, consumer spending is already ticking up, according to Sal Guatieri, senior economist at BMO Economics. The latest data shows increased hotel occupancy and restaurant visits, and the weekly volume of initial unemployment claims has set a new pandemic low for three straight weeks.

Those things, as well as all the extra savings many people have amassed during the pandemic, “will provide a tailwind for households, countering the drain from fast-rising prices,” he wrote in a commentary.

That’s certainly what the National Retail Federation is banking on. The trade group predicted holiday sales would still hit a new record high despite shortages of the items people want and continually rising prices. 

Still, survey results released by Morning Consult Thursday showed consumer sentiment continued to fall despite the declining daily case counts and the recent rally in the stock market because of worries about inflation and shortages.

“A combination of near-term pessimism and an inability to purchase desired products could weigh on spending through the fourth quarter,” Morning Consult warned.

A slowing economy is especially worrisome when inflation is high because it puts the Federal Reserve in a tough position. Typically the Fed would raise benchmark interest rates or do other things to tighten the money supply and control inflation, but the downsides of doing that are riskier when the economy is weaker. The Federal Reserve’s policymaking arm has said it could start this so-called tightening in November. 

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