Hangover Arrives For US Economy

As expected, the US economic expansion faltered in the third quarter, data out Thursday showed.

The world’s largest economy grew at a 2% annual rate in Q3 (figure below), down markedly from Q2’s 6.7% pace.

The headline print was well short of consensus. Economists expected 2.6%, but the downside surprise likely wasn’t large enough to materially alter the macro narrative, which already centered around the assumption that growth peaked over the summer.

The range of estimates, from nearly six-dozen economists, was -0.1% to 5%.

Recall that expectations for global growth turned negative for the first time in 18 months in the latest installment of BofA’s Global Fund Manager survey, while yield curves are now virtually screaming “policy mistake,” “growth scare” or both.

Personal consumption rose 1.6% in Q3, the US data showed (figure below).

The dramatic decline from Q2’s 12% pace was expected. In fact, consensus expected just a 0.9% increase, so the spending figure for the third quarter was a relative bright spot.

A look at the breakdown shows goods consumption dropped 9.2%, with spending on durables falling more than 26% compared to a 12% increase in Q2. One might speculate that supply chain issues were a factor. Services spending, on the other hand, rose almost 8%.

“Reopening momentum continues to favor the narrative that service spending will pick up the mantle as goods consumption wanes,” BMO’s Ian Lyngen said Thursday, following the release.

The jury is still out on the financial and psychological well-being of the US consumer. Surging prices and elevated near-term inflation expectations served to undermine buying perceptions in the University of Michigan’s sentiment survey, but the Conference Board’s gauge painted a slightly happier picture this week.

It’s tempting to say that much depends on the fate of fraught fiscal stimulus talks in Washington, but that might be a red herring. As it turns out, the vast majority of Americans know almost nothing about The White House’s social spending plan, and Progressives seem to lose a new battle every day in their ongoing war with Joe Manchin.

As for business spending, nonresidential fixed investment rose 1.8% in Q3, the GDP figures showed (figure below).

It’s the same story: Everything is decelerating from Q2’s rapid pace, but it’s difficult to know how to interpret the slowdown. Some of it is just the economy coming off an unsustainable sugar high. Some of it is capacity constraints. And so on.

I would note Q3 marked the second consecutive quarter during which the pace of business investment slowed. Residential investment declined for a second straight quarter.

On the inflation front, core PCE increased 4.5%, down from 6.1% the prior period.

“We are confident that the fourth quarter will be much better. High frequency consumer activity numbers such as flights, restaurant dining and hotel stays have turned higher through mid-September into October as the Delta wave subsided,” ING’s James Knightley remarked. “Inflation is a bit of a concern due to its impact on spending power, but incomes are rising and household balance sheets are in great shape with household wealth having increased $26 trillion since the end of 2019,” he added, suggesting that “should allow households to weather [the] temporary storm of higher energy costs.”

I’d gently note that in order to benefit from the dramatic increase in “household wealth” your household has to own a house or financial assets. As discussed at length in “Congrats, You’re All Rich,” most Americans probably haven’t seen much of that $26 trillion.

Taken as a whole, the report might fairly be described as a modest disappointment. Generally speaking, it’s consistent with the prevailing narrative or, as BMO’s Lyngen put it, “broadly conforms to the realities of the current stage of the recovery.”

More broadly, the problem is that the “slowdown” phase is colliding with a coordinated tightening effort across developed market central banks. That effort is aimed at combatting the knock-on effects of cost-push inflation, which may not respond to rate hikes (let alone expectations thereof) unless and until tighter policy leads to demand destruction via recession or, at the least, an even sharper slowdown than the one we’re witnessing now.