Third Quarter GDP: The Economy Slows Dramatically

By SBE Council at 28 October, 2021, 1:18 pm

Anti-Growth Policies Taking Their Toll

by Raymond J. Keating –

The recovery from the pandemic hit the skids in the third quarter of this year, according to the latest GDP report from the U.S. Bureau of Economic Analysis.

Real GDP growth (on a seasonally adjusted basis at an annual rate) pushed forward at a mere 2.0 percent in the third quarter. That was down from 6.7 percent in the second quarter and 6.3 percent in the third.

Source: Federal Reserve Bank of St. Louis, FRED

When you crawl inside the report to look at major portions of GDP, the negatives run far ahead of positives.

The Numbers are Not Encouraging

First, the consumer pulled in with real personal consumption expenditures (PCE) growing by only 1.6 percent, with spending on goods declining by 9.2 percent thanks to a drop off of 26.2 percent in spending on durable goods.

Second, real nonresidential business investment in the third quarter grew by only 1.8 percent, down from 12.9 percent in the first quarter and 9.2 percent in the second quarter. Investment in equipment declined by 3.2 percent in the third quarter, with structures investment down by 7.3 percent. The lone area of strength for business investment was a 12.2 percent increase in intellectual property products, including software.

Third, nonresidential (or housing) investment dropped by 7.7 percent in the third quarter, and that came after a decline of 11.7 percent in the second quarter.

For good measure, it should be noted that changes in private inventories contributed 2.07 percentage points to the 2 percent GDP growth rate. Inventory measures are temporary – that is, inventories vary considerably from quarter to quarter and do not reflect long-term investment gains. And this jump reflected a replenishment from big declines in the previous two quarters. That needs to be considered in evaluating this third quarter GDP growth story, as well as looking ahead.

Fourth, trade was a mixed bag. Real exports declined by 2.5 percent in the third quarter. Exports fell in two of the last three quarters. As for imports, they grew overall by 6.1 percent (keep in mind that nearly all imports are inputs to U.S. businesses), but while goods imports declined by 0.1 percent, service imports jumped by 44.4 percent.

Fifth, inflation was clear in the GDP price index – one of the broadest measures of prices – which increased by 5.7 percent in the third quarter, after annualized increases of 6.1 percent in the second quarter and 4.3 percent in the first quarter.

Again, there’s little to take away from this that is positive or encouraging.

The Looming Questions and Recovery

Since the pandemic first hit, three questions loomed large for the economy.

First, how long would it take for the economy to recover in the sense of getting back to where we were pre-pandemic? That happened in the second quarter of this year.

Second, what would growth look like once we got back to that pre-pandemic level? The third quarter of this year provides at least a first look, and it’s not positive. Two percent growth is anemic under normal circumstances, given that the U.S. economy on average should be growing at better than 3 percent and during non-recession periods at better than 4 percent.

Third, how long will it take the U.S. economy to get back to where it should be, that is, given the lost growth we’ve experienced since the pandemic hit? The answer to that question, of course, relies on the answer to the second question. At 2 percent growth, U.S. economic under-performance will be extended far into the future.

The natural questions then are: What’s happening? And what can be done?

While part of the third quarter GDP story was about the Delta variant and supply challenges, I have been warning throughout this pandemic crisis that if public policy is pointed in the wrong direction, our recovery and expansion will be undermined.

Anti-Growth Policies are Taking Their Toll

Specifically, an agenda of higher taxes, increased government regulation, anti-free trade, accelerated government spending, and unmoored monetary policy would restrain and undermine economic growth. This is a policy agenda designed to be anti-entrepreneur, anti-investment, and anti-growth.

Nonetheless, this is exactly the policy agenda on the table right now. The push by President Biden and congressional Democrats is for higher taxes, more regulation, and increased government spending. And neither the Biden administration nor Congress has done anything to roll back the costly, protectionist trade measures imposed by the Trump administration.

Meanwhile, the Fed seems oblivious as to their proper role in policy, that is, working to maintain price stability.

No one should be surprised, therefore, given this agenda, that our economy under-performs. Indeed, whatever levels of growth are achieved – and hopefully, we’ll see a little bounce back in the fourth quarter – they will be all about entrepreneurs, investors, businesses and workers fighting off governmental burdens.

Hey, here’s a crazy idea: If we really want the economy, incomes and jobs growing robustly, perhaps policymakers should looking to provide real, substantive relief from government costs and burdens, so entrepreneurs, businesses, investors and workers can innovate, create, build, and produce.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.