Finance

Economic growth rate slows to 2 percent as delta derails recovery

Economic growth slowed sharply between July and September as the emergence of the COVID-19 delta variant derailed the recovery from the coronavirus recession, according to data released Thursday by the Commerce Department.

U.S. gross domestic product (GDP) grew at an annualized rate of 2 percent in the third quarter, according to the Census Bureau's first estimate. The economy grew at a 6.7 percent yearly pace in the second quarter of 2021, marking a sharp slowdown as the delta surge began.

"The increase in third quarter GDP reflected the continued economic impact of the COVID-19 pandemic. A resurgence of COVID-19 cases resulted in new restrictions and delays in the reopening of establishments in some parts of the country," the Census Bureau explained.

"Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased."

The beginning of the delta surge in late July upended an economy that was adding roughly 1 million jobs per month. As cases surged, schools either delayed or canceled in-person education, consumer activity in hard-hit sectors declined and millions of Americans were unable to return to the labor market.

While more recent data has shown the economy shaking off some of the delta shock, the Census Bureau data shows the depths of the damage created by the surge.

Consumer spending fell off sharply in the third quarter, rising just 1.6 percent after soaring 12 percent higher in the second quarter. The decline in personal consumption expenditures was largely due to a steep drop in spending on autos and auto parts-which have skyrocketed in cost this year-and slowdown in the growth of restaurant, bar, and hotel spending.

Spending on autos and auto parts plummeted by 26.2 percent in the third quarter and dragged goods spending down by 9.2 percent on the whole. Spending on services rose by 7.9 percent, a decline from 11.5 percent in the second quarter.

"Third quarter GDP came in lower than expected, mainly due to a steeper-than-expected drop in consumer spending," said Robert Frick, corporate economist at Navy Federal Credit Union. 

"The rise of the Delta wave, and-to a lesser extent-supply chain issues, caused the slowdown, but with Delta dropping drastically, consumer spending should have a strong rebound in the fourth quarter. We already have evidence that's started."

Economists largely attributed third-quarter slowdown to the impact of the resurgent pandemic, which has also caused global chaos in supply chains. While most remain optimistic that the U.S. economy has already begun to improve, the drop poses another political challenge for President Biden amid high inflation and uncertainty over when prices will ease.

Biden and Democrats are scrambling to strike a deal to pass both the bipartisan infrastructure bill passed by the Senate this summer and the larger climate and social services reconciliation package. The release of the GDP report came hours after Biden announced a deal on a framework for the larger package, which may not be enough to appease progressives, who insist on passing both bills in tandem.

Sen. Mike Lee (R-Utah), vice chairman of the Joint Economic Committee, said the report exposed the "fragility of the ongoing economic recovery" and condemned Democrats for a push to "impose new taxes, regulations, mandates, or subsidies that would make work less attractive."

"Instead, we should unburden the communities that are the engine of our growth and remove the regulations and other government-imposed disincentives that stand in the way of America's exceptional workers, innovators, and job creators," Lee said.

Rep. Kevin Brady (Texas), top Republican on the House Ways and Means Committee, in a statement blamed the entirety of the decline on Biden "bungling the recovery" without acknowledging the impact of the pandemic. 

While the U.S. is among several wealthy nations facing high inflation and slowing job growth because of the delta wave, Republicans have pinned those issues on Biden as they attempt to retake control of Congress in the 2022 midterm elections.

In a Thursday thread on Twitter, the White House Council of Economic Advisors acknowledged that growth came in "below expectations at a slower pace" in the previous three months but highlighted a strong increase in inventories and boost in spending by state and local governments.

Some economists also cited other reasons for optimism, including a solid 11.7 percent increase in business investment driven by a 12.2 percent boost in spending on research and development, software and other intellectual property products.

"The pandemic has triggered the most robust investment boom in equipment and intellectual property since WWII. This is ushering in large productivity gains, which could have some legs," wrote Diane Swonk, chief economist at Grant Thornton, in a Thursday analysis.

Swonk compared the increase in business spending to the run-up to the year 2000, when businesses deployed billions of dollars to shore up computer systems as they switched over to a new millennium. 

"The economy held up better than expected during the Delta wave. That underscores the importance of vaccines and natural immunity in keeping the economy open even as infections surge," she wrote.

Updated at 10:16 a.m.

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