US: The Economy Slows, Inflation Grows

The economy took a breather in the third quarter, as GDP slowed to a 2.0% q/q annualized rate, significantly weaker than already soft consensus estimates of 2.7%. It was the slowest quarter of the recovery, by a long way, but the details paint a different picture. Consumption grew by only 1.6%, but it was because auto sales fell by an extraordinary -54%.

Apparently, due to the chip shortage, there are no cars to buy. If auto sales had stayed at the same level as in Q2, GDP in Q3 would have grown 4.6% and consumption would have grown 5.2%. So consumers didn’t buy cars. But they did buy services at a q/q annualized rate of 7.9%, and that was after last quarter’s 11.5.

Once again the comments from the ISM participants are compelling:

• “Global supply chain issues continue. Getting anything from China is near impossible — extreme delays. Microchip and circuit breaker shortages continue and are expected to continue into 2022.” [Computer & Electronic Products]
• “Business is getting stronger, but the supply chain is getting worse every day.” [Chemical Products]
• “Strong sales continue; however, we have diverted chips (semiconductors) to our higher-margin vehicles and stopped or limited the lower-margin vehicle production schedules.” [Transportation Equipment]
• “Import costs and delays hurting business, requiring more safety stock for uncertainty. Rolling blackouts in China starting to hurt shipments even more.” [Food, Beverage & Tobacco Products]
• “Domestic original equipment manufacturer (OEM) capital-expenditure spending is trending up for our business. We are seeing an increase of capital equipment with life spans of more than 10 years in the fourth quarter.” [Fabricated Metal Products]
• “Demand continues to be strong, but we continue to be held back by supply chain issues — logistics delays, as well as capacity and labor issues at suppliers.” [Electrical Equipment, Appliances & Components]
• “Business remains strong, with brisk incoming orders. We have become much more supply driven versus demand driven, due to shortages of labor, materials and freight. Costs continue to increase on all fronts, and we are considering our third price increase of the year for our customers.” [Furniture & Related Products]
• “Customer demand remains high. COVID-19 related supply chain issues still hamper our ability to meet demand. Labor is still difficult for our suppliers to obtain, and labor costs are rising.” [Machinery]
• “Demand for our products remains strong, but we continue to struggle to secure enough raw material to keep our manufacturing lines running.” [Miscellaneous Manufacturing]
• “My prediction is that 2022 will be very similar to 2021 — similar demand, constrained supply, restricted logistics and rampant inflation.” [Plastics & Rubber Products]

Speaking of inflation, again, housing prices are growing at nuclear-powered rates. The Case-Shiller national home price index is rising at a record high rate of 19.9% y/y as compared to the 30 year average (ex-Covid) of 3.8%. 

Again, like in the PCE deflator charts, note how quickly housing prices have ramped up; last year at this time the rate was only 5.8%. The second chart compares the growth rate of housing prices to wages, starting in 2019. Over that time, housing prices have risen by an astonishing 28.5%, almost three times as much as wages have. Clearly, this is an unsustainable situation.