COVID-19’s Delta variant slammed breaks on US third quarter growth

During the third quarter, it is likely that the U.S. economy grew at its slowest pace in more than a year with the Delta variant of COVID-19 acting as a drag against the economy.

The US Commerce Department’s advance gross domestic product report scheduled to be released later today is expected to show strong inflation, fuelled by economy-wide shortages and pandemic relief money from the government, all which cut into the country’s growth.

There are signs that economic activity picked up towards the end of the third  quarter midst declining COVID-19 cases driven by the Delta variant.

“Delta is the biggest reason why we have this noticeable deceleration,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

He went on to add, “We’re going to see growth re-accelerate in the fourth quarter and the first half of next year as the effect of the Delta variant begins to wane. It doesn’t mean that we won’t have future waves of COVID, but with each passing wave, the economic costs continue to diminish.”

The biggest goods trade deficit on record had prompted Wall Street banks, including Goldman Sachs, to cut their GDP growth estimate, trimming forecast by half a percentage point to a 2.75% rate. The Atlanta Federal Reserve trimmed its already low forecast to a 0.2% pace from a 0.5% rate.

The anticipated low growth rate is seen coming mostly from a moderate pace of inventory drawdown. Overall inventory accumulation likely remained weak owing to shortages, especially in the motor vehicle industry.

Outside the shutdown in spring 2020, September was the worst month for motor vehicle production since 2010 because of a global shortage of semiconductors.

“The largest boost to GDP should come from a slower drawdown of inventories compared to in the second quarter, as supply shortage issues initially presented through weaker inventories but now have become a constraint on consumption instead,” said Veronica Clark, an economist at Citigroup in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is forecast to have stalled following a robust 12% growth rate for the first quarter.

Glimmer of Hope

With cases declining significantly in recent weeks, there is light at the end of the tunnel. Improving public health has helped lift consumer confidence this month. The number of Americans filing new claims for unemployment benefits has also dropped to a 19-month low.

Economists are split on whether business investment in equipment maintained its pace of double-digit growth last quarter. Data released on Wednesday showed a surge in shipments of capital goods excluding aircraft in September.

While some economists perceived this as an indication of strong equipment spending, others cautioned that high prices flattered the value of shipments. There are also concerns that the scarcity of motor vehicles hindered efforts by companies to replace or increase their auto fleet.

“Just as the collapse in motor vehicle sales is dragging down consumption, the corresponding collapse in fleet sales is also weighing on business equipment investment,” said Michael Pearce, a senior U.S. economist at Capital Economics in New York.

“The sharp fall in auto and truck shipments means that, rather than a double-digit annualized gain, business equipment investment probably contracted slightly in the third quarter.”

High prices of building materials and soaring house prices likely weighed on the housing market again last quarter, while government spending probably rebounded.

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