GDP Growth Slowed Amid Supply-Chain Difficulties and Delta Variant Cases

Consumers Cut Back Spending in Q3

Economic growth slowed during the third quarter as supply-chain problems and rising prices prompted consumers to rein in their spending. Gross domestic product, or GDP, which tracks the total value of goods and services a country produces in a given period, grew 2% last quarter. This was the slowest increase since the pandemic recovery began. Economists had forecasted third-quarter economic growth of 2.8%.

Consumer spending eked out growth of just 1.6% last quarter. This was much lower than the 12% rise seen during the second quarter. Consumer spending accounts for nearly 70% of the US economy. Pent-up demand after months of lockdowns drove strong consumer spending in the second quarter of the year. However, rising cases of the Delta variant, and other factors, caused the spending frenzy to die down last quarter.

Federal Government Cuts Back Spending

While the Delta variant weighed on spending in the early part of the third quarter, activity picked up toward the end of the quarter as the number of COVID-19 cases began to wane. Economists expect growth to re-accelerate during the fourth quarter and in the first half of 2022.

The slower-than-expected economic growth in the last quarter was fueled by a number of factors. Lower consumer spending was one. A drop in residential fixed investment was another. Additionally, the US trade deficit widened to $73.3 billion, which weighed on growth.

Meanwhile, federal government spending dropped 4.7%. The Commerce Department said that was because spending on resources for processing Paycheck Protection Program loans was down.

Growth Is Expected to Resume

It is not surprising that consumers curbed their spending at the start of the third quarter. With prices of everything from food to clothing rising, a consumer’s disposable income does not go as far. In the third quarter, disposable personal income fell 0.7% while the personal savings rate declined to 8.9% from 10.5%.

Investors appear to be taking the weaker-than-expected GDP growth in stride. After all, COVID-19 cases are slowing and unemployment is steadily declining. In general, higher prices are not having an impact on corporations’ bottom lines, as demonstrated by a number of strong earnings reports released recently. Now, economists and business leaders will be eager to see if spending and economic growth picks up as the holidays approach.

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