Commentary Directory

Delayed or Disappearing Growth?

Jacob Hess
October 31, 2021

The Week Behind

It was a wild week of reporting for the global economy with several countries releasing Q3 2021 GDP data. The US led on Thursday with the BEA's report then France, Germany, and Italy followed on Friday along with a summary of euro area GDP growth from Eurostat. The releases reflected a quarter where global supply disruptions dominated economic news, and the disruptions have led to a clear slowdown in economic activity, especially in the United States.

Growth expectations for the US were pared back throughout the year as the COVID recovery looked to be in danger, but even the latest projections turned out to be too optimistic. At just 2.0% QoQ SAAR in Q3 2021, the advance estimate of US GDP swung lower than many forecasts. Some notable misses include a 6.8% QoQ SAAR estimate that was the median estimate of the Philadelphia Fed's Survey of Professional Forecasters, a 3.4% QoQ SAAR estimate by TD Bank made in September 2021, a 3.5% estimate by the Conference Board on October 13th, and a 3.0% estimate (the closest of the bunch) by Wells Fargo on October 14th. As evidenced by the trajectory of projections over time, a healthy pessimism had been growing quickly throughout Q3, but it wasn't strong enough to lead the experts to a more accurate reading of the economic slowdown.

The disappointing 2.0% GDP growth was primarily driven by a huge decline in goods consumption which fell -9.2% QoQ SAAR in Q3 after surging 27.4% and 13.0% in Q1 and Q2. It was fewer big ticket item purchases that dragged GDP down as a combination of durable goods inflation and drained excess savings muted demand. The recovery in service consumption, up 7.9% QoQ SAAR was not enough to boost overall personal consumption as much as forecasts forsaw. However, this gap was larger than expected as the service recovery was once again delayed by input price inflation and a service industry labor force reluctant to return to the status quo. The net export portion of GDP also took a hit from supply disruptions with a -5.1% drop in goods export and a 44.4% increase in services imports boosting the trade deficit.

The Q3 2021 growth picture in the euro area was more positive than what was reported in the US. Eurostat showed growth of 2.2% QoQ and 3.7% YoY in Q3 which was actually a slight improvement on some forecasts: ING Economics expected a 3.5% YoY growth rate in the third quarter in its October forecast and Deutsche Bank projected growth of 1.8% QoQ. A positive Q3 is likely to be overshadowed by a cooler Q4 when disruptions from energy shortages and input cost inflation have more of an effect on the euro area. A strong Q3 was also supported by bounces in France up 3.0% QoQ, Italy up 2.6% QoQ, and Austria up 3.3% QoQ as they recovered from late quarterly GDP declines in Q4 2020.

Last week's GDP reports could end up shifting the narrative that the Fed and other financial organizations have built so far. What began as "transitory" disruptions leading to a "delay" in the recovery could devolve into permanent setbacks that could disappear potential growth. This would be a major issue for developed central banks that have normalization plans based around the "transitory" narrative. The Fed, ECB, BoE, et cetera can hold off on moving in response to rising prices if growth stays at recovery pace, but "stagflationary" pressure would force a delay in monetary policy normalization.

Chart of the Week


The story of the quarter: goods consumption is pulling back sharply as prices rise and manufacturing stalls, but service consumption is still way off track.

The Week Ahead

The November FOMC meeting begins on Tuesday this week, and many expect the committee to start the tapering process that has been prepared for some time. GDP was slightly disappointing last week, but it's likely not enough of a setback to negate a tight labor market that the FOMC members believe has seen "substantial progress." There will also be an update on October employment at the end of the week, after the Fed reports, but it will probably not have an effect on monetary policy.