US economy is better than it looks

Por Karl Smith

The US economy was weaker than expected in the third quarter, which is bad news for any American whose livelihood depends on strong economic growth and especially disappointing for the White House, which is struggling to reassure voters about the state of the economy amid rising prices and a historic supply crisis.

Overall growth in the third quarter was 2%, a significant decrease from the rates of 4.5% and 6.7% registered by the country in the first two quarters of the year.

However, on closer inspection, the report appears to be much better.

For starters, the federal government’s most comprehensive indicator of demand for the entire economy, final sales to domestic buyers, rose approximately 6.6%. Notably, it is almost perfectly on track for the pre-pandemic trend.

This measure, unlike the overall GDP figure, is not adjusted for inflation. Therefore, it indicates that businesses, consumers and the government spent more, but took home less goods and services due to higher prices.

Furthermore, most of the decline in real purchases is seen exactly where it would be expected: the auto sector. Only the decline in sales of motor vehicles and their spare parts cut 2.7 points in gross domestic product.

This suggests that without the chip shortage that continues to plague the auto industry, the economy would have posted 4.7% annual growth in the third quarter, roughly in line with the pace at the beginning of this year.

For its part, household service consumption continued to rebound, adding 3.6 points to real GDP, compared to 2.1 and 5.4 in the first two quarters of the year. That suggests the economy continues to rebalance itself from last spring and winter lockdowns, which caused a collapse in the service sector and a corresponding explosion in the consumption of goods.

Perhaps most importantly, employee compensation at private companies grew to a solid 9.2%, easily outpacing rising inflation. Surprisingly, the offset is slightly above its pre-pandemic trend. As long as that is the case, the growth prospects will remain positive.

Finally, producers’ inventories continued to fall, as they have throughout the year, indicating that pent-up demand is releasing among businesses and consumers alike. This factor will help drive economic growth in the coming year and beyond.

On the whole, then, the report is a sign that stagflation – negative real growth combined with high inflation – is not a risk. For that to happen, there would have to be an increase in prices along with a static or decreasing purchasing power. That is the opposite of what this report shows.

Yes, real GDP growth slowed dramatically in the third quarter. But the gap is more than explained by the shortage of car supply. At the same time, consumers and businesses are in the process of rebalancing spending from goods to services, causing some bottlenecks in the supply chain. As soon as they are eliminated, the US economy will be ready to return to higher growth.