The U.S. economy was weaker than expected in the third quarter, which is bad news for any American whose livelihood depends on strong economic growth and especially disappointing for the White House, which is struggling to reassure voters about the state of the economy amid rising prices and a historic supply crunch. Overall growth in the third quarter was 2%, a fair step down from rates of 4.5% and 6.7% the U.S. economy logged in the first and second quarters.
On closer inspection, however, the report looks a lot better.
For starters, the federal government’s most comprehensive measure of economywide demand, something called final sales to domestic purchasers, rose roughly 6.6%. Notably, it’s almost perfectly on track with the pre-pandemic trend. This measure, unlike the headline GDP number, isn’t adjusted for inflation. So it’s indicating that businesses, consumers and the government spent more, but they took home fewer goods and services because of higher prices.
Moreover, the lion’s share of the decline in real purchases is exactly where it would be expected: the automobile sector. The decline in sales of motor vehicles and parts alone chopped 2.7 points off gross domestic product. This suggests that, absent the chip shortage that continues to plague the auto industry, the economy would have registered annual growth of 4.7% in the third quarter — roughly in line with its pace earlier this year.
Meanwhile, household consumption of services continued to rebound, adding 3.6 points to real GDP, compared with 2.1 and 5.4 in the first two quarters of the year. That suggests the economy is continuing to rebalance from the lockdowns of last winter and spring, which caused a collapse in the service sector and a corresponding explosion in the consumption of goods.
Perhaps most important, compensation of employees at private businesses grew at a robust 9.2%, easily outpacing the rise in inflation. Remarkably, compensation is slightly above its pre-pandemic trend. As long as that’s the case, the outlook for growth will continue to be positive.
Finally, producer inventories continued to fall, as they have all year, indicating that pent-up demand is accumulating among businesses as well as consumers. This factor will help propel economic growth into next year and beyond.
Taken as a whole, then, the report is a sign that stagflation — negative real growth combined with high inflation — is not in the cards. For that to happen, there would have to be rising prices alongside static or declining spending power. That’s the opposite of what this report shows.
Yes, real GDP growth slowed dramatically in the third quarter. But the gap is more than accounted for by the supply crunch in automobiles. At the same time, consumers and businesses are in the process of rebalancing from goods to services, causing some supply-chain bottlenecks. As soon as those are cleared, the U.S. economy will be poised to return to higher growth.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.