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Market Commentary: Supply Issues and Delta Variant Slow Economic Growth to 2%

U.S. GDP grew at an annualized pace of just 2% last quarter, a marked slowdown from last quarter’s 6.7% (Figure 1). Contracted auto production sliced around 2% off growth, and concerns over the Delta variant slowed demand and the return of workers to the labor force. Third quarter growth disappointed many. Final estimates were for 2.8%, and those had been much higher earlier in the quarter.

Key Points for the Week

  • U.S. annualized GDP growth slowed to 2% from 6.7% last quarter as concerns over the Delta variant and ongoing supply issues limited economic growth.
  • Businesses seeking to restructure supply chains and altered demand patterns have pushed business investment 13.2% higher during the last 12 months.
  • Core PCE inflation increased 0.2% in September, the lowest level in seven months.

Businesses have multiple options when facing a supply shortage. One is to automate more tasks, and business investment increased 13.2% during the last 12 months. Another option is to increase prices. Core PCE inflation indicates prices are rising at a slower pace. The 0.2% increase in inflation for goods excluding food and energy was the smallest in the last seven months and indicates businesses are being cautious when raising prices. When the chief shortage is labor, wage increases can help lure people back to the labor force. Employment costs jumped 1.5% in September.

Investors looked past some of the weakness in the report and focused on the positive. The S&P 500 added on 1.3% and finished 7.0% higher in October. The index of 500 large U.S. stocks ended the month at a new record. The global MSCI ACWI tacked on 0.4%. The Bloomberg U.S. Aggregate Bond Index increased 0.5% last week but finished the month basically unchanged. The U.S. employment report and another round of corporate earnings are the top two data points this week.

Figure 1

Misfiring

The U.S. economy can no longer be characterized as hitting on all cylinders. This is especially true since the lack of new car production was a major reason economic growth increased much less than expected.

Growth increased just 2%, using annualized calculations (Figure 1), missing final estimates for 2.8%. Supply chain woes showed up throughout the report but most strongly in automobile manufacturing and sales. Automobile sales sliced 2.4% off overall growth as motor vehicle and parts sales plunged 17.6% last quarter.

To pin the blame on new car sales and broader supply challenges alone would be unfair. Initial estimates were for high single-digit growth in the third quarter, and those estimates were reduced consistently. The Delta variant contributed to slowing economic activity by making it riskier for consumers to engage. It also affected whether workers would return to the labor force. Restaurants and other service organizations are having a hard time finding workers, and the labor shortage may have contributed more to the slowdown than sluggish demand. Restaurant purchases grew at less than 25% of last quarter’s rate, indicating reopening didn’t occur fast enough keep the economy in high gear.

Growth is expected to bounce back sharply in the fourth quarter. Economists anticipate some improvement in supply chain challenges. COVID-19 cases are declining, and several countries are reaching major vaccination milestones, which should increase production and alleviate some product shortages. Inventories have also been tapped for supply in recent quarters, and manufacturers will increase production for immediate sale and to provide adequate inventory for future demand.

There are risks to expecting a big bounce back next quarter. Challenges in the supply chain are proving persistent, as companies struggle to adjust to higher demand. Labor supply isn’t bouncing back as quickly as many hoped. Many workers have left the labor force, and service businesses can’t recover as quickly without them. The U.S. employment report will provide the next major set of clues to determine if this economy can recover its strength.

About Christina Hester Snyder

Christina is an associate partner and wealth advisor at Jacob William Advisory with a storied 20-plus year career in financial services. Christina is known for her commitment to her clients and is dedicated to helping them alleviate their financial fears through education and planning that goes far beyond investments. She believes in a comprehensive approach that addresses all facets of planning, including wealth transfer, insurance, taxes, investments, estate and trust planning, retirement, risk management, and business planning. Christina graduated from the University of Baltimore with a Bachelor of Science in Business with an emphasis in international business. She also holds many professional designations, including CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Financial Consultant® (ChFC®), Retirement Income Certified Professional® (RIPC®), and Certified IRA Services Professional (CISP™). She is an active member of her community and is involved in many professional and nonprofit groups, including acting as the president of the Maryland chapter of Women in Insurance & Financial Services and serving on the board of a nonprofit that helps Maryland families with financial hardships. To learn more about Christina, please click here.

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