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The US economy slowed in the third quarter as the Delta variant surged

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The US economy slowed in the third quarter as the Delta variant surged

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Economic growth slowed sharply over the summer, the government reported on Thursday, reflecting the impact of the resurgence of the pandemic on keeping consumers at home and the supply chain bottlenecks that have leads to empty shelves and higher prices.

The outlook for the rest of the year is mixed: the grip of the pandemic is loosening. Supply chain issues, on the whole, are not.

Inflation-adjusted gross domestic product rose 0.5% in the third quarter, the Commerce Department said. This was down from 1.6% in the second quarter and was the weakest growth since the recovery from the pandemic began in the spring.

As late as July, economists predicted that the recovery would accelerate in the second semester, with widespread immunization allowing students to return to school, workers to return to work, and consumers to return to restaurants and hotels.

“At the time, the recovery seemed to be on the right track and it looked like it was going to gain momentum,” recalled Ben Herzon, executive director of IHS Markit, a forecasting firm. “Considering the state of things, it could only get better. “

But that was before the spread of the Delta variant led to a new wave of coronavirus cases across much of the country, and before the full impact of the global supply chain grunts became clear.

The good news for the economy is that the direct damage from the Delta variant has been relatively modest and has started to wear off. Spending on hotels and restaurants increased in the third quarter, albeit more slowly than at the start of the year. More recent data from OpenTable, the restaurant reservation app, and the Transportation Security Administration suggests restaurants and air travel have started to rebound as cases of the virus have subsided.

The biggest driver of the summer slowdown was supply chain issues that made it difficult for US stores and factories to get the products and parts they need. Spending on goods fell 2.4% in the third quarter, adjusted for inflation, led by a sharp decline in sales of cars and other durable manufactured goods.

Economists still expected spending on goods to decline somewhat as the effect of government assistance checks sent out earlier this year wears off and pandemic-induced changes in spending patterns begin. to return to normal. But they said the sharp drop in the third quarter almost certainly reflected supply chain issues. Falling auto sales – resulting from a global shortage of microchips that crippled auto production – accounted for about 90% of the overall decline in spending on goods.

Automakers said this week that they expect the chip shortage to gradually improve. But there are few signs that the broader supply chain issues will go away anytime soon.

“In some places things can get worse before they get better, in some areas they can stabilize before they get better,” said Robert Rosener, senior US economist at Morgan Stanley. “It’s a very mixed picture, but there is nothing to signal immediate relief.”

Most forecasters expect GDP growth to pick up somewhat in the last three months of the year, but few expect a rebound strong enough to offset the disappointing third quarter results.

Still, the economy is in much better shape than forecasters predicted for most of last year. Gross domestic product returned to its pre-pandemic level in the second quarter, although it did not catch up to what it would be if the pandemic had never occurred. Government assistance, along with reduced spending during the pandemic, has left Americans full of cash, which should support spending for the rest of the year – as long as retailers have merchandise to sell them.

“We want to put this in perspective: why is the United States in these conditions? Because the economic recovery is so strong, ”said Beth Ann Bovino, chief US economist for S&P Global. “The problem is that companies cannot manufacture products quickly enough to meet demand. “

The combination of high demand and limited supply drives up prices. Consumer prices rose 1.3% in the third quarter, slightly slower than the previous quarter but still well above the pre-pandemic rate. Prices increased 4.3% from the previous year.

In government statistics, faster price increases lead to slower inflation-adjusted growth: consumers spend just as much but receive less in return.

The combination of faster inflation and slower growth is causing headaches for policymakers. Normally, when the economy slows down, the government and the Federal Reserve can stimulate activity by cutting interest rates or giving households cash. But these tools don’t help when the issue is supply and not demand.

President Biden argues that his economic agenda, including spending on infrastructure and childcare assistance, will lead to faster shipping and a larger workforce, but these policies, if they work, will take years to have a significant effect.

In the shorter term, the Federal Reserve has signaled that it will start withdrawing support for the economy as early as next month, in part because supply chain issues have caused inflation to accelerate.

“Bottlenecks and tangled supply lines are dragging down activity in some sectors, particularly the automotive industry,” Fed Chairman Jerome H. Powell said in a virtual speech last week. He added that “the combination of strong demand for goods and bottlenecks has meant that headline inflation is well above our target.”

Officials still expect the factors forcing inflation to subside as the virus wears off and supply chains return to normal, Powell noted, but he said of his mistrust and the recognition that getting back to business as usual might take time.

At 360 Painting, a residential and commercial painting company with 120 franchises across the country, business has skyrocketed during the pandemic as homeowners sought to refresh their homes during the lockdown. Demand has remained strong this year, but the company faces an unexpected challenge: a paint shortage.

“In 25 years of home service and paint jobs, I have never seen anything like it where you walk into a paint store and they are out of paint,” said Dave Rychley, president of the company.

At first, Mr Rychley said, he expected the problem to be brief. But as this dragged on, the company had to adapt, warning customers to expect delays and pushing them to choose paint colors early to ensure they could secure their supplies on time. Franchisees have also raised prices.

“If we pay more for a gallon of paint, we’re going to pass it on to the customer at some level,” Mr. Rychley said.

The company also faces another supply shortage: labor. For many franchisees, said Rychley, finding skilled workers is even more difficult than finding paint.

Economists say the labor shortage could start to ease as the Delta variant recedes and more Americans feel comfortable returning to work.

But it will take time to unravel the web of disruptions the pandemic has caused in the supply of goods and labor, said Constance L. Hunter, chief economist at KPMG, the accounting firm. Many parents, for example, cannot return to work until they can get reliable and affordable child care, but child care centers face their own staffing crisis.

“It’s a chicken and egg problem,” Ms. Hunter said.

The booming supply chain is in part the result of higher spending on goods during the pandemic, as Americans bought cars instead of plane tickets, training equipment instead of gym memberships and kitchen equipment instead of restaurant meals. These patterns began to reverse as the pandemic faded, but not completely, in part because the pandemic itself has not fully receded.

“Once the pandemic is in the rearview mirror in the United States, we are not going to continue to consume goods at this rate,” Ms. Hunter said. “But Covid lasted a lot longer than people expected. “

Jeanne Smialek contributed reports.

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