In the face of COVID, US economy contracted to a 2% pace last quarter

The U.S. economy was severely affected by the rising number of COVID-19 cases, and the persistent shortages of supplies. It experienced a 2% annual rate growth in the July-September period. This is the lowest quarterly expansion since the start of the recovery from the pandemic recession last year.

In the face of COVID, US economy contracted to a 2% pace last quarter

Thursday's Commerce Department report estimated that the country's gross domestic product, which is the total output of goods and service produced by the country, fell from 6.7% and 6.3% respectively in the second quarter. These strong growth rates were fueled by large federal rescue funds.

The quarter's 2% annual growth was below expectations. It would have been even worse if businesses hadn't increased their restocking. They added whatever supplies they could get. This inventory rebuilding contributed 2.1 percentage points of the quarter's modest growth.

After a surge of 12% in the quarter before, consumer spending, which accounts for 70% of economic activity, has slowed to 1.6% annual growth.

Economists are optimistic about a rebound in the current October-December period. With confirmed COVID cases falling, vaccination rates increasing, and more Americans spending money, they remain hopeful. Many economists believe that GDP will recover at an annual rate of at least 4 percent this quarter.

Gregory Daco (chief U.S. economist, Oxford Economics) stated that "the key story right now" is the improving health situation. "People feel a lot more comfortable moving around."

According to airlines, there has been an increase in passenger traffic. Businesses are also investing more. Wages are rising as employers struggle with attracting more people into the workforce. As the year draws to a close, a resurgence in consumer spending could be a catalyst for economic growth.

However, rising costs, particularly for fuel, food and rent, are adding to the burden on American consumers, and diminishing the benefits of higher salaries. As the Federal Reserve prepares to withdraw the emergency assistance it gave to the economy last year, inflation has become a major concern.

The government's Thursday report, which was the first of three estimates for last quarter's GDP, revealed widespread weakness. Consumption fell by 26.2% in durable goods like appliances and autos. The modest annual increase in sales of clothing and other nondurable goods was 2.6%. Services purchases rose at 7.9%, a decrease of 11.5% in the previous quarter.

Businesses also slowed down. After a 9.2% increase in annual corporate investment in equipment and plants in the April-June quarter, this 1.8% rate of growth in corporate capital slowed. After a sharp 11.7% drop in residential construction, the rate of residential construction fell to 7.7%.

Exports fell at 2.5% per year, while imports rose by 6.1% -- an increase that has led to congestion in ports. Last quarter's annual growth was 1.1 percentage points less due to the gap between imports and exports.

According to opinion polls, the public is becoming more concerned about inflation. This has led to President Joe Biden's approval rating falling. Jerome Powell, Fed Chair, has suggested that higher inflation can be attributed to temporary factors. These include bottlenecked supply chains due to the rapid economic recovery. Others worry that inflation pressures could become more persistent.

Inflation data linked to Thursday's GDP Report showed that consumer prices rose at an elevated 4.5% annual rate in the last quarter, but were down from 6.1% during the second quarter.

To support their claims that Biden's economic policies have failed, Republicans have focused on higher inflation in this year's election.

Texas' top Republican, Kevin Brady, called the new GDP Report "awful" and said it was more evidence that President Biden is failing to recover.

Biden and his Democratic friends have been working to push Congress two major spending bills through -- one to improve the nation's infrastructure and the other to create a social safety net bill. This bill includes climate change insurance, child tax credits, and health insurance. The White House presented a $1.75 trillion proposal for a social safety net. This is a significant reduction from the initial $3.5 trillion plan, which ran into opposition from Republicans and two important Democratic senators.

Thursday's government estimate of GDP growth was lower than the economists expected for a significant slowdown. Growth was hindered by the effects of the Delta variant which kept some people from eating at restaurants, shopping centers, and entertainment venues.

The September increase in employment by American employers was just 194,000, which is a second consecutive slowdown. This indicates that the pandemic continues to grip the economy and many companies are struggling to fill the millions of jobs.

Mark Zandi (chief economist at Moody's Analytics) stated that the "delta wave of pandemic caused a lot of harm -- it caused consumers to become more cautious." "The virus surge disrupted supply chains across the globe and caused disruption in production in many industries. It also created havoc on the job market."

Recent viral cases have been steadily declining, and economists believe that the economy is now accelerating again. Zandi predicts 6% annual growth in the fourth quarter. Some economists expect a stronger rebound depending on whether there are any more viral cases or if supply shortages start to ease.

Economists expect that 2021 will see growth of 5.5%. This would be the largest calendar-year growth rate since the mid-1980s, and a significant improvement on the 3.4% GDP plunge in 2020. It would easily surpass the sub-3% annual growth rates in economic growth that existed in years prior to the pandemic recession.

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