GDP Growth Slows as Supply Constraints Weigh on Economic Output

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 2.0 percent seasonally adjusted annualized rate (SAAR) in Q3 2021, the slowest growth rate since the economic recovery began, according to the preliminary estimate from the Bureau of Economic Analysis (BEA). Personal consumption expenditures, weighted down heavily by a 53.9 percent decline in motor vehicles and parts, decelerated to 1.6 percent annualized growth from 12.0 percent in Q2. Net exports reached its largest deficit on record as exports fell and imports surged at a 6.1 percent annualized rate.
• Personal income, adjusted for inflation, declined 1.4 percent in September, driven by the expiration of enhanced unemployment benefits, according to the BEA. Excluding transfer payments, real personal income moved up 0.2 percent. The saving rate dropped 1.7 percentage points to 7.5, which is only two-tenths higher than it was in September 2019. The PCE price index and core PCE (core excludes food and energy prices) were up 4.4 percent and 3.6 percent from a year ago, respectively, both of which were the fastest annual paces of growth since the early 1990s.
• Durable goods orders fell 0.4 percent in September, according to the Census Bureau. When excluding orders for transportation equipment, however, new orders rose 0.4 percent. Core capital goods (nondefense excluding aircraft) orders increased 0.8 percent. Inventories of core capital goods rose 1 percent.
• The Conference Board Consumer Confidence Index increased 4.0 points to 113.8 points in October, the first increase since June. Consumer confidence in the present situation and consumer expectations for the future rose by 3.1 and 4.6 points, respectively. According to the press release, while short-term inflation concerns hit a 13-year high, the “proportion of consumers planning to purchase homes, automobiles, and major appliances all increased in October."
• New single-family home sales jumped 14.0 percent in September to a SAAR of 800,000, the highest level since March, according to the Census Bureau. However, the two previous months were revised downward. The number of houses sold that were completed went up 30.8 percent on a non-seasonally adjusted basis, though the level is still 19.0 percent lower than in September 2019. The number of new homes for sale was flat at 379,000, though a record 28.0 percent of those homes had not yet been started. The months’ supply moved down eight-tenths to 5.7.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, declined 2.3 percent to 116.7 in September, its second highest level since January.
• The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, increased 18.5 percent from a year ago in August, a slight deceleration from the previous month, ending a 14-month streak of continuous acceleration in prices.

Forecast Impact:

GDP growth was slightly slower than our estimate of 2.2 percent growth, which was already below consensus estimates, due primarily to a larger-than-expected drag from net exports and weaker-than-anticipated government spending. Though consumption of durable goods (excluding autos) was stronger than expected, we anticipate ongoing supply constraints will likely limit growth in goods consumption, holding back overall PCE growth in the near term. The PCE price index growth was in line with our expectations, and we expect that inflation on an annual basis will likely peak in Q4 but remain elevated through 2022 amid shortages, upward wage pressure, and higher housing costs being reflected in the price indices.

We had expected a pullback in pending home sales, though the decline was smaller than we anticipated. Our near-term sales forecast may therefore be moved modestly upward. However, both the new and pending home sales reports continue to reflect strong housing demand confronting a tight supply of homes available for sale. The increase in new home sales was in line with our expectations, and the total inventory available for sale at the end of the month remained flat at the highest level since 2008 despite the sales increase, suggesting homebuilders are finding sufficient lots to generate a higher sales pace going forward. Despite ongoing supply and labor challenges, we expect new home sales to move upward over the first half of next year.

Rebekah Gutierrez and Nathaniel Drake
Economic and Strategic Research Group
October 29, 2021

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