Slower Growth in Q3

Keynesianism can temporarily giveth, but ultimately always taketh away...and then some.

When the US fell into the COVID crisis, the federal government went on a massive spending binge. Pre-COVID, in the twelve months through March 2020, federal outlays were $4.6 trillion, or 21.4% of GDP. In the next twelve months outlays soared to $7.6 trillion, or 36.2% of GDP. Outside of wartime, we know of no other time when the government has ramped up spending that much or that fast. As a result, as well as very easy money, the economy partially bounced back faster than it would have in the absence of the extra spending.

But the extra spending was like an opioid given to a car crash victim, temporarily masking the economic pain caused by government-imposed shutdowns. Ultimately, there is no free lunch when it comes to spending, and the economic bill is already starting to come due.

As recently as early August, the consensus among economists was that real GDP would grow at about a 7% annual rate in the third quarter, even faster than it grew in the first half of the year when the government was passing out checks like it was going out of style. Now, as we set out below, we're estimating that the economy grew at only about a 2% rate.

Consumption: Car and light truck sales fell at a 61.6% annual rate in Q3, largely due to supply-chain issues, while "real" (inflation-adjusted) retail sales outside the auto sector were roughly unchanged. The good news is that although we only have reports on spending on services through August, it looks like real services spending should be up at a solid rate. Putting it all together, we estimate real consumer spending on goods and services, combined, increased at a tepid 0.9% annual rate, adding only 0.6 points to the real GDP growth rate (0.9 times the consumption share of GDP, which is 69%, equals 0.6).