"Q3 2021 - Thinking Our Way Through the Economy"
By: Joseph R. Tranchini, CFA
GROSS DOMESTIC PRODUCT
- Growth in the U.S. Economy continued to slow in Q3 2021 having only grown by a rate of 2.0% (SAAR). This constitutes a large deceleration from the prior two quarters where growth came in at 6.7% & 6.3% (SAAR)1,2
- The Consumption component of GDP experienced a sharp deceleration in growth during Q3, coming in at a rate of only 1.9%. The prior quarter’s growth in Consumption was much higher at a rate of 12.0%. Within Consumption, consumer spending on Goods contracted by a rate of -9.2%, which drastically differs from the prior quarter’s decisively positive growth rate of 13.0%. The pronounced slowdown in Goods spending appears to be primarily attributed to a large contraction in spending on Durable Goods, which decreased at a rate of -26.2%. Consumer spending on Services decelerated slightly to a pace of 7.9% relative to the prior quarter’s rate of 11.5%, however this rate of growth remains greatly elevated in relation to historical norms for Services spending1,2
- The Private Investment component of GDP accelerated greatly in Q3 to a pace of 11.7%, up big from the prior quarter’s contraction of -3.9%. Within the Private Investment component, Non-Residential investment remained positive but decelerated greatly to a pace of 1.9%, down from the previous quarter’s rate of 9.2%. Non-Residential Investment was brought down by contractions in Structure Investment of -7.3% and Equipment Investment of -3.2%, while Software Investment remained robust at a pace of 15.7%. Residential Investment contributed negatively to growth in the quarter, having contracted at a rate of -7.7%. Residential Investment was negatively affected by contractions in Single Family housing of -9.4%, Multi-Family housing of -3.5%, and Residential Equipment Investment which contracted by -17.0%. The majority of the growth experienced in the aggregate Investment component of GDP appears to have been driven by positive effects from changes in Private Inventory levels1,2
- Net Exports
- Net Exports contributed negatively to U.S. GDP growth in the quarter, as is usually the case, and was driven both by increases in Imports of 6.1%, as well as a decrease in Exports of -2.5%. This quarter marked the 5th consecutive quarter that the U.S. Trade Deficit reached a new all-time high. The U.S. Trade Deficit in Q3 came in at $1.31T1,2
- Government spending was relatively flat during Q3 having grown at a modest pace of 0.8%. Within the aggregate Government spending component, Federal Government spending contracted significantly during the quarter at a rate of -4.7%, its second consecutive quarter of contraction. State & Local Government spending accelerated in the quarter to a pace of 4.4%, up from 0.2% in the previous quarter. State & Local Government spending was primarily bolstered by increases in both Software spending, which continued its consistent high rate of growth at a pace of 14.8%, and Consumption Expenditures which increased at a pace of 6.9%1,2
- The Unemployment Rate has continued its path towards renormalization in Q3 and now stands at a level of 4.6%. This marks a significant improvement from a year ago when the rate came in at 6.9%1,6
- As a reference, the pre-pandemic Unemployment Rate was around 3.5%1,6
- The total number of individuals in the Labor Force has stagnated over the past few months, now coming in at a level of 161.5M. Pre-pandemic Labor Force levels were 164.5M1,6
- Additionally, the Labor Force Participation Rate is still below its pre-pandemic levels. Current Labor Force Participation Rate is now 61.6%, down relative to the January 2020 level of 63.4%1,6
- The number of individuals who are currently employed has also recovered in recent months and now stands at a level of 154M1,6
- This still represents about a 4.7M differential relative to January 2020 levels which came in at 158.7M1,6
- Weekly Initial Claims for Unemployment Insurance have also improved to a level of 269K, down considerably from a year ago when the same metric was 765K1,6
- Continuing Claims for Unemployment Insurance have also improved relative to a year ago, now coming in at a level of 2.1M relative to 7.07M a year ago1,6
- Some noteworthy industries that have experienced robust employment renormalization since January 2020 levels include:
- Construction: 1147K jobs regained out of 1206K lost: Recapture 95%1,6
- Retail Trade: 2270K jobs regained out of 2419K lost: Recapture 94%1,6
- Transportation: 816K jobs regained out of 612K lost: Recapture 120%1,6
- Industries that have been slower to renormalize employment levels since January 2020 include:
- Health Care: 1312K jobs regained out of 1703K lost: Recapture 77%1,6
- State Government: 279K jobs regained out of 505K lost: Recapture 55%1,6
- Local Government: 1020K jobs regained out of 1637K lost: Recapture 62%1,6
- Both Headline & Core Inflation have decelerated consecutively each month since June and April respectively1,3
- Headline Inflation is currently running at a pace of 3.9% (SAAR), down considerably from its June level of 6.7%1,3
- Core Inflation is now coming in at a rate of 2.6% (SAAR), which is also down from its previously high mark of 7.7% in April1,3
- Both Headline & Core Inflation metrics remain above the Federal Reserve’s average Inflation target of 2.0%1,3
- The recent deceleration in Inflation has been relatively uniform across the price levels of both Goods and Services1,3
- Goods Inflation is currently being measured at a rate of 5.8%, down from its May level of 10.6%1,3
- Deceleration in Goods Inflation appears to be primarily stemming from a large deceleration in Durable Goods Inflation which has dropped from a level of 27.7% in May to its current level of 3.8%1,3
- Services Inflation is now coming in at a pace of 2.9%, down from its June level of 5.2%1,3
- Standout areas of deceleration within Services include Transportation Services which contracted by -26.1% in September, as well as Food Services & Accommodations which decreased from a pace of 16.2% in June to its current level of 3.3%1,3
- Market-based measures of future Inflation expectations have remained elevated near decade highs4,5
- Expectations for forward-looking 5yr average Inflation remain north of 2.8%, while expectations for 10yr average Inflation appear to have anchored around the 2.5% mark4,5
- Both 5yr & 10yr Inflation expectations have risen sharply since the initial lockdown phase of the COVID-19 pandemic in early 20204,5
- Continued supply-chain disruptions attributable to mass labor shortages appear to be a primary factor in keeping market expectations for future Inflation near historically high levels4,5
FORWARD LOOKING ASSESSMENT
Although still growing at a positive rate, the U.S. Economy’s growth decelerated rather significantly during Q3 to a pace of 2.0%1,2 (SAAR) from the prior quarter’s reading of 6.7%1,2 (SAAR) as supply-chain disruptions materially held-back economic activity across a wide array of sectors. Large scale labor shortages, which have indiscriminately permeated numerous areas of the economy, contributed meaningfully to decreases in the availability of many major consumer-facing goods during the quarter. This unfortunate reality was particularly felt in the economic realm of Durable Goods which experienced a historic contraction over the period, having declined by -26.2%1,2 (SAAR) as individuals looking to buy “big-ticket” items could simply just not get their hands on them at reasonable prices. Interesting enough, areas of the economy which are not particularly prone to supply-chain woes continued to experience rather robust economic growth. A likely ray of hope in an otherwise underwhelming quarter. Even if consumers are unable to find reasonable deals on major goods at present time, this evidently did not limit their ability to spend money in other arenas, as was evidenced by robust growth across areas such as Transportation Services of 41.5%1,2 (SAAR), Healthcare at 5.7%1,2 (SAAR), and Recreation Services of 16.5%1,2 (SAAR). Apparently, supply-chains cannot hold everyone back…
“A fair deal at a fair price” has never seemed like as much of an alien concept as it does right now. A head-on collision between rapidly increasing economic demand and problematic supply-chain issues has resulted in the reanimation of inflation levels that have not been witnessed since before people started carrying cell phones. Even so, over the past 3 months the pace of Inflation, both Headline & Core, has moderated closer to historically average levels. This dynamic is in stark contrast to what market expectations are for future inflation, which have continued to tick upward since mid-2020 and are currently courting decade-long highs. Nevertheless, the Federal Reserve is still adamant in its view that the abnormally high levels of Inflation currently being felt across the economy are, in fact, transitory and will substantially abate throughout 2022 as supply-chain activity normalizes and rises-up to meet the awakening of the U.S. Economy’s demand in the post-pandemic era. In other words, what goes up must eventually come down.
3 problems, 1 source. Constrained economic growth, abnormally high Inflation, and supply-chain disruptions all appear to be the symptomatic manifestation of one universally shared cause, the absence of Labor. A natural extension of this realization would then be to ask both what needs to be done to attain higher levels of Labor, as well as when such a phenomena might be reasonably expected to occur? In an effort to attract and retain workers, employers all across the economy are offering incentives such as higher wages, schedule flexibility, and sign-on bonuses. Current and prospective workers are taking notice, with individuals who are currently working ‘swapping’ their existing jobs to take advantage of opportunistically better offerings, and prospective workers being provided with the impetus necessary to re-renter the Labor Force. However, even with the allure of better working circumstances and the recent expiration of enhanced unemployment benefits, job growth has not rebounded as elastically as one might have hoped. The explanation might lie within a familiar concept, savings. Paradoxically, throughout the pandemic both Personal Income, as well as Personal Savings, increased substantially. Increased savings appear to have afforded those who remain unemployed after the expiration of enhanced unemployment benefits time to ‘find the right fit’ when it comes to the job search process. Important to note, savings do not last forever and neither does an opportunistic job market. In time, absent labor will, in all likelihood, have to return to the labor force. When that happens, it is more than reasonable to expect the confluence of economic issues currently constraining the economy to ease and give way to more robust economic growth. Given this outlook, it would become clear that two core principles will remain as important now as they ever have been. Time & patience, a warmly familiar cast of characters who just so happen to be the very best friends of the long-term investor.
[See Below for Disclosures & Annotations]
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- FactSet. “Economics – Country/Region – United States”. October 28, 2021.
- Bureau of Economic Analysis. “Gross Domestic Product, 1st Quarter and Year 2021 (Advance Estimate)”. October 28, 2021.
- Bureau of Economic Analysis. “Personal Income”. October 29, 2021
- FRED. “5-Year Breakeven Inflation Rate”. November 2, 2021
- FRED. “10-Year Breakeven Inflation Rate”. November 2, 2021
- Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. November 5, 2021