Is the U.S. Economy the Walking Dead?

Just in time for Halloween, two reports spooked economists. The first (of three) readings of third quarter growth showed a big deceleration, as the Delta variant and ongoing supply chain issues slowed down almost all parts of the U.S. economy. Q3 GDP expanded at a 2 percent annualized pace, down from 6.7 percent in Q2 and 6.3 percent in Q1. While the report came in shy of already-lowered expectations, the astounding part was how much activity rolled over from the beginning of the quarter, when the consensus expectation was for a 7 percent annualized gain.

And while some may have cheered the increase in wages in the GDP report (up 1.3 percent in the third quarter from the second quarter, the fastest pace since records began in 2001), workers needed those extra dollars to contend with higher prices. A separate report on September Personal Income and Spending showed that accounting for inflation, real disposable personal income decreased by 1.6 percent from the previous month.

Does this mean that the U.S. economy looks like zombies from The Walking Dead? Before we plunge into despair, let’s remember that the inventory issues that have been exacerbated amid the pandemic are distorting many aspects of the recovery. Economist Joel Naroff notes that the big problem in the Q3 GDP report was a big drop in auto and truck purchases, “which took 2.4 percentage points out of growth.” The culprit was telegraphed months ago: there are simply not enough vehicles for sale. “The demand is there, the supply isn’t. That is not a sign of weakness,” says Naroff. 

There is no doubt that the economy has slowed down and that supply issues will linger well into next year, but fourth quarter growth could double from the 2 percent pace in Q3, as consumers come into the holiday season ready to step up spending. Whether they are willing to further deplete their savings to do that is not clear.

Americans have already started to spend down some of the more than $2.4 trillion in excess saving that they accumulated from the pandemic period. Diane Swonk, chief economist at Grant Thornton notes “a good portion of that saving was drained in September when income support [federal supplemental unemployment insurance] lapsed.” In September, the savings rate dropped to 7.5 percent, the lowest of the pandemic and close to the pre-pandemic level of 8.3 percent in February of 2020. Swonk predicts that “Much of the excess savings that low-income households were able to save from earlier stimulus will be drained by year-end. The good news is that employment gains are expected to pick up now that the Delta wave of COVID has abated.”

The government will release the October jobs report next week and it is expected that hiring will pick up to about 400,000, from the 194,000 recorded in August, when the Delta variant was at its height.

Indeed, the U.S. economy is moderating from the blistering pace of the first half of the year, but current slower economic conditions are not likely to stop the Fed from beginning to taper their purchases of bonds. The FOMC convenes its two-day policy meeting on Tuesday and Wednesday.

Zombies are not invited to join.