Growth Slowed in Q3 Because of the Chip Shortage and the Delta Variant. The Future Should Be Better.

The downturns in everything from car sales to dining out will probably either bottom out or at least moderate in the months ahead.

Americans produced about 0.5% more goods and services in July-September than in April-June.¹ That would have been a respectable quarterly growth number in normal times, but it’s disappointing in light of how well things had been going earlier in the recovery from the pandemic.

The good news is that a close parsing of the data suggests that the slowdown is probably temporary, with faster growth ahead. The specific categories that dragged down the national total—motor vehicles, restaurants, and recreation—will eventually stop getting worse and then turn positive, which should provide a nice boost as the rest of the economy keeps chugging along at normal speed.

Some quick context: pandemic disruptions and the need to rebalance

The biggest economic consequence of the pandemic was that consumers across the world were suddenly unable or unwilling to spend money on services ranging from restaurant meals to vacations to dental checkups. That deprived businesses of revenue, which in turn meant that their suppliers and workers were also missing out on needed income.

Governments in much of the world spent more than $10 trillion to offset those losses, which allowed businesses to stay afloat and allowed consumers to keep spending money. Instead of doctors’ visits and spa trips, they went for appliances, computers, cars, gym equipment, and housing.

In the U.S., inflation-adjusted consumer spending on durable goods accounting for inflation was 34% higher at the peak in March 2021 than in February 2020, while consumer spending on services—a much bigger category—was 6% lower. Spending on groceries, clothes, and other “nondurable” goods was also higher, with the net effect that total consumption ended up rising at about the same clip as in the years immediately before the pandemic.

We also saw this pattern in investment, with spending on homebuilding, residential remodeling, and other housing costs² booming even as businesses cut back on their own construction projects.

The promise of mass vaccination and getting the virus under control³ was that it would stop people from getting sick and dying, thereby allowing for normalcy to return. Rebalancing from goods to services was both expected and desired.

One option was that spending on goods would remain elevated, but that the growth rate in consumer spending on goods would slow while the growth rate in services spending accelerated. Alternatively, a surge in spending on services could have offset a decline in consumer spending on goods from its elevated level.

Either way, rising consumer spending on goods would end up contributing less to total GDP growth than in the past few quarters while spending on services would contribute more. Eventually, we’d return to something like the pre-pandemic pattern where services spending dominated goods spending. Similarly, a shift in investment away from homebuilding and other forms of residential investment might also have been expected after the surge of panic-buying in 2020.

All of this was more or less happening in the first half of 2021.

Rebalancing was on track until Q3