The economy grew at an annualized inflation-adjusted rate of 2.0% in the third quarter of 2021, a sharp drop from the second quarter’s 6.7%. This slowdown reflects the broad reach of the ongoing global pandemic. Surging cases in the summer made people more leery about going out. Overseas customers of U.S. businesses struggled with widespread infections and income losses, which cut the demand for U.S. exports. But mostly, the continuing spread of the virus disrupted supply chains around the world. Consumers and businesses had a hard time getting goods. The result is slowing consumer spending, declining business investments and falling U.S. exports. All of this adds up to less growth.
Any decline in consumer spending growth drags down overall growth because consumer spending is the largest share of the economy. Consumer spending grew by 1.6%, down from 12.0% in the second quarter. This was also the slowest rate of increase during the pandemic recovery. Consumer spending on services such as going out to restaurants and spending money on recreational activities such as sports grew by 7.9%, down from 11.5% in the second quarter of 2021. The slowdowns were especially large for restaurants and hotels, which grew by still a remarkable 12.4% in the second quarter, down from a whopping 68.0% in the second quarter, and recreation services, which increased by a strong 16.5% during the period from July to September 2021, down from 41.3% in the second quarter. To some degree, the slowdown in consumer demand reflects the surging coronavirus cases associated with the more transmissible Delta variant during the summer months. It also likely represents a correction to more normal levels of consumer spending after consumers splurged on these services in the spring, when coronavirus cases were very low.
Supply chain bottlenecks are a bigger obstacle to consumer spending than fears over the surging pandemic. Consumer spending on durables such as cars and furniture fell by 26.2% in the third quarter, down from an increase of 13.0% in the second quarter. The declines were especially large for cars and car parts (-53.9%) as well as furniture and other household items such as refrigerators (-10.3%). People could not buy large-ticket items amid global supply chain disruptions, including chip shortages.
The declines did not stop there. Household spending on new homes and renovations also declined, reflecting a shortage in building supplies. Spending on multifamily and single family homes as well as on manufactured homes and home improvements all fell for a combined decline of 7.7%, following a decline of 11.7% from April to June 2021. Builders and homeowners had trouble getting lumber and other materials to complete their projects in the spring and summer of 2021.
These supply chain disruptions also affected businesses’ own investments. Business spending on equipment such as office equipment and trucks, fell by 3.2% in the third quarter, contributing to a slowdown in overall business investment growth from 9.2% in the second quarter to 1.8% in the third quarter. Spending on office equipment, other than computers, including phones, medical equipment, photocopiers and printers, fell by 10.0% in the second quarter, while other equipment spending still grew. And, business investments on trucks and other transportation equipment, dropped by an annualized rate of 18.5% in the third quarter. Businesses encountered similar supply chain bottlenecks as consumers did and thus could not get their orders filled.
The global pandemic also took its toll on U.S. exports. U.S. firms sold 2.9% fewer goods and services to overseas customers in the third quarter than in the second quarter of 2021. Exports of food, industrial supplies and materials, petroleum and products, computers and peripherals and other capital goods such as machines used in manufacturing all fell in the three months from July to September 2021 relative to the prior three months. Exporters likely encountered both difficulties in shipping their goods and experienced a drop in demand as the continuing global pandemic hurt consumers and businesses around the world.
The pandemic casts a wide shadow over the global economic recovery. At this point, its impacts on supply chains take the largest toll on U.S. economic growth, while people’s fears of falling ill amid the recent surge also played a role. President Biden has emphasized vaccinations and other mitigation strategies to get the pandemic under control. The president has also pushed private businesses to extend hours of operations and urged them to do more to reduce supply chain bottlenecks. Congress is close to passing the Bipartisan Infrastructure Deal, which will help lower supply chain hurdles by expanding transportation capacity, for example. But, government spending alone cannot solve this issue. Private businesses will need to speed up investments in capacity as well to get the economy going again.