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Daily Brief - The good news? Growth tanked in Q3 (Oct 29, 2021)

The US economic growth absolutely tanked in Q3.


T-a-n-k-e-d.


The economy grew by 2.0% in the third quarter. This pace marked a sharp slowdown from unheard of gains earlier in the year. Gross domestic product grew at a historically fast annual rate of 6.3% in the first quarter and 6.7% in the second quarter. In particular, consumer spending rose at an annual rate of 1.6% in the third quarter, a sharp slowdown from a 12% increase in the prior quarter.


Ok, it’s true, 2% growth actually isn’t bad by pre-Covid standards. 2% would have been a middle-of-the-road, steady-as-she-goes kind of number. But against the backdrop of jaw-dropping stimulus checks and unprecedented monetary policy, it’s, well, pretty bad.


Why is this happening? And what does it mean for you?


In the first two quarters of the year infusion of government stimulus, widespread business reopenings and rising vaccination rates fueled a blistering rate of spending. Those spending drivers faded from July to September. Two additional factors arose over the summer to damp third-quarter growth: a surge in virus cases and deepening supply bottlenecks.


And herein lies the good news.


First, much of the slowdown - particularly on the consumer side - was actually because consumers weren’t able to buy the stuff they wanted. The goods were stuck on ships in the Suez canal, or in factory lots, anywhere but the store where a UPS truck could have loaded them up and delivered to your door. That means there is some pent-up demand that will likely come back in the quarters to come as logistical nightmares start to get sorted out.


Second, a cooling down of the economy takes some heat - no pun intended - off the Federal reserve already unnerved by skyrocketing inflation numbers. Temporary deceleration will, in the short term, relieve concerns that Fed’s action is imminent. At the same time, the temporary nature - spending will presumably return as the goods become available - also mitigates worries about the bogeyman of investors everywhere: stagflation.


In summary, for the moment, little has changed for investors. To quote a banker from another crisis: as long as the music is playing, you've got to get up and dance.