U.S. economy slowed to a 2% rate last quarter in face of COVID

<p><p>WASHINGTON — Hampered by increasing COVID-19 cases and persistent supply shortages, the U.S. economy slowed sharply to a 2% annual growth rate in the July-September period, the weakest quarterly expansion since the recovery from the pandemic recession began last year.</p></p><p><p>Thursday’s report from the Commerce Department estimated that the nation’s gross domestic product — its total output of goods and services — declined from robust growth rates of 6.7% in the second quarter and 6.3% in the first quarter, gains that had been fueled by vast infusions of federal rescue aid.</p></p><p><p>The 2% annual growth last quarter fell below expectations and would have been even weaker if not for an increase in restocking by businesses, which added whatever supplies they could obtain.</p></p><p><p>Such inventory rebuilding added 2.1 percentage points to the quarter’s modest expansion.</p></p><p><p>By contrast, consumer spending, which fuels about 70% of overall economic activity, slowed to an annual growth rate of just 1.6% after having surged at a 12% rate in the previous quarter.</p></p><p><p>Economists remain hopeful for a bounce-back in the current October-December period, with confirmed COVID cases declining, vaccination rates rising and more Americans venturing out to spend money. Many economists think GDP will rebound at a solid annual growth rate of at least 4% this quarter.</p></p><p><p>“The key story right now is the improving health situation,” said Gregory Daco, chief U.S. economist at Oxford Economics. “People are feeling a lot more at ease about moving about.”</p></p><p><p>Airlines have reported growing passenger traffic, businesses are investing more and wages are increasing as employers struggle to draw more people back into the job market.</p></p><p><p>A resurgence of consumer spending could help energize the economy as the year nears a close.</p></p><p><p>At the same time, though, rising prices, especially for gasoline, food, rent and other staples, are imposing a burden on American consumers and eroding the benefits of higher wages.</p></p><p><p>Inflation has emerged as a threat to the economic recovery and a key concern for the Federal Reserve as it prepares to start withdrawing the emergency aid it provided to the economy after the recession struck last year.</p></p><p><p>Thursday’s report from the government, the first of three estimates of last quarter’s GDP, showed widespread weakness.</p></p><p><p>In consumer spending, purchases of durable goods, like autos and appliances, fell at a sizable 26.2% rate.</p></p><p><p>Sales of clothing and other nondurable goods slowed to a modest annual gain of 2.6%.</p></p><p><p>And purchases of services rose at a 7.9% rate, down from an 11.5% annual rise in the previous quarter.</p></p><p><p>Businesses, too, held back. Corporate investment in equipment and plants slowed to a 1.8% rate of growth, after a 9.2% annual increase in the April-June quarter.</p></p><p><p>Residential construction declined at a 7.7% rate after an even sharper 11.7% drop in the previous quarter.</p></p><p><p>Last quarter, exports declined at a 2.5% annual rate while imports rose at a 6.1% rate — a surge that has contributed to clogged ports.</p></p><p><p>The gap between exports and imports subtracted 1.1 percentage points from last quarter’s annual growth.</p></p><p><p>Opinion polls have shown that the public is growing increasingly concerned about inflation, a trend that has contributed to a decline in President Joe Biden’s approval ratings.</p></p><p><p>Some economists, including Fed Chair Jerome Powell, have attributed higher inflation mainly to temporary factors, notably bottlenecked supply chains resulting from the speed of the economic recovery.</p></p><p><p>Others say they worry that inflation pressures will prove more chronic.</p></p><p><p>The inflation data tied to Thursday’s GDP report showed consumer price increases at a still elevated 4.5% annual rate last quarter but down from 6.1% in the second quarter.</p></p><p><p>Republicans have zeroed in on higher inflation this year to support their charges that Biden’s economic policies aren’t working.</p></p><p><p>Rep. Kevin Brady of Texas, the top Republican on the Ways and Means Committee, called the new GDP report “awful” and “more proof that President Biden is bungling the recovery.”</p></p><p><p>Biden and his Democratic allies have been trying to push through Congress two major spending bills — one to upgrade the nation’s infrastructure, the other a social safety net bill that involves climate change, health insurance and child tax credits, among other items.</p></p><p><p>On Thursday, the White House unveiled a $1.75 trillion social safety net proposal, scaled down significantly from an initial $3.5 trillion plan that ran into resistance from Republicans and two key Democratic senators.</p></p><p><p>The government’s estimate Thursday of GDP growth last quarter was even lower than economists’ forecasts for a significant slowdown.</p></p><p><p>The effects of the delta variant, in keeping some people away from restaurants, retail shops and entertainment venues, was a key drag on growth.</p></p><p><p>In September, America’s employers added just 194,000 jobs, a second straight sluggish monthly gain and evidence that the pandemic was keeping its grip on the economy, with many companies struggling to fill millions of open jobs.</p></p><p><p>“The delta wave of the pandemic did a lot of damage – it caused consumer to turn more cautious,” said Mark Zandi, chief economist at Moody’s Analytics. “The virus surge scrambled global supply chains and disrupted production in a lot of industries and also created havoc in the job market.”</p></p><p><p>But in recent weeks, viral cases have steadily fallen, and many economists say they think the economy is accelerating again.</p></p><p><p>Zandi is predicting 6% annual growth for the current fourth quarter, and some economists foresee an even stronger rebound, depending on whether viral cases continue to fade and supply shortages begin to ease.</p></p><p><p>For 2021 as a whole, economists generally expect growth to amount to around 5.5%.</p></p><p><p>That would be the highest calendar-year expansion since the mid-1980s and a sharp improvement from the 3.4% plunge in GDP in the recession year of 2020.</p></p><p><p>It would also easily exceed the sub-3% annual economic growth rates that prevailed in the years before the pandemic recession.</p></p>