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GDP disappoints in Q3 as supply chain takes a toll on growth

Q3 GDP quarter-over-quarter came in at 2.0% vs. 2.6% expected. Yahoo Finance's Emily McCormick breaks down the data.

Video Transcript

JULIE HYMAN: But we do begin with those GDP numbers because we did get a bit of a surprise on GDP, as well as some of the components within that report. Our Emily McCormick is here to break that down for us. Emily, good morning.

EMILY MCCORMICK: Good morning, Julie. And US GDP did post a bigger than expected slowdown in the third quarter of this year, largely reflecting the impacts of the delta variant and some moderation in spending as government stimulus was pared back compared to earlier this year. And of course, not to mention those ongoing supply chain challenges that we saw throughout the July through September quarter.

But going through these numbers from this report, third quarter GDP grew on a quarter over quarter annualized rate of 2.0%. That compared to a 2.6% increase expected and a 6.7% annualized rise that we saw in the second quarter of this year.

Now personal consumption, which comprises about 2/3 of overall economic activity, was up by just 1.6%. That compared to the 0.9% increase expected, but also a market slowdown compared to the 12% rate that we saw in the second quarter. And then also taking a look at core personal consumption expenditures, those were up 4 and 1/2% on a quarter over quarter basis. And that was in line with estimates.

Now, in addition to personal consumption, also want to highlight a number of other components of GDP that served as a drag on that headline number. We saw that net exports subtracted 1.1 percentage points from the headline rate, owing to a widening trade deficit. And we just got out that goods trade gap data before the bell yesterday. That had widened to a record high in September. So, again, really seeing exports sinking and imports rising as businesses try to bring in goods to keep pace with demand.

Now, a couple of other components here. Residential fixed investment, which, of course, tracks housing market activity, was a drag on GDP for a second straight quarter, also owing to the tight inventory levels and the rising prices that we've seen in the housing market weighing on affordability and purchasing activity.

But then on the flip side, I do want to highlight a couple of components that contributed to GDP in the quarter as well. And we saw inventories adding more than two percentage points to that headline number after back to back quarters of declines previously. So that does suggest that businesses were working to replenish some of their out of stocks.

And then we also saw government spending at about 0.1 percentage points to the headline number as well. And that did reverse some declines from the second quarter. But overall, the usual caveat does still apply here, which is that GDP, which is comprehensive, is also a backwards-looking view of economic activity. A number of economists have said that some of the concerns around the delta variant and perhaps even the supply chain shortages may start to clear up in the coming quarters. We'll see where things shake up in the final three months of this year. But at least for the third quarter, a disappointment here on headline GDP. Guys.

JULIE HYMAN: Thank you so much for that comprehensive look at those numbers. Let's continue to dig into it a little bit. One of the things that stuck out to me was that build in inventories, which I thought was really interesting, Brian Cheung, that we keep talking about, certainly on an anecdotal basis, a lot of companies saying they can't keep up with demand right now, and many of them showing deficits in inventories. Maybe, even though it is backward-looking, maybe this is a little bit encouraging.

BRIAN CHEUNG: Yeah, well, I mean, certainly, when you talk about an increase in inventories, you do wonder if that's a little bit of a, I guess, reserved kind of build-up, if you will, for future quarters to come because, obviously, you have a lot of these companies maybe who had foreseen the supply chain issues trying to stockpile whatever it is that they're selling in anticipation of those types of issues. So you have maybe some of that pull forward.

But I think what's kind of broadly interesting about this report is that, yes, indeed, it did miss on the top line, as Emily was just explaining, it clocking in at 2% for the third quarter, certainly below that 2.6% estimate that we had seen ahead of time. But most of that is due to things that we had already known, maybe just to a magnitude that we weren't expecting, right?

So reduced federal spending, which usually is a big bonus to GDP, was, obviously, less of a factor in quarter three than it was in quarter two and especially quarter one, when most of that fiscal stimulus from the Biden administration was happening. But durable goods tanking in the quarter, down 26.2% on an annual basis. Again, not a surprise, not necessarily because of an inventory-related thing, but just because the supply chain issues made it really difficult for people to go out and find any sort of goods.

But at the same time, we have to understand that some of this dynamic is also because of the increased demand that we saw for goods in the quarter of comparison, which was the second quarter. Again, I have my beefs with the way that the GDP numbers are reported. We have to keep in mind that these percentage numbers are a quarter over quarter, but annualized rate. So it's trying to compare what was the difference between quarter 2 and quarter 3, but then you kind of extrapolate that across four quarters. So, again, it's not that 26.2% was a contraction in a single quarter. That just happens to be the rate if it were to continue for another three quarters.

Now, one other thing that's worth mentioning-- Emily also touched on this-- net exports was a big factor here. Imports of services, which is actually a net negative to GDP, actually spiked by 44.4%. People might be wondering, what the heck is in import of services? Well, think about things like intellectual property, finance, insurances. Those types of things were huge in this quarter.

And that's because of the bottleneck that we had and a lack of goods being able to get imported here in the United States with ships stuck off the Port of LA. So, again, all this kind of pointing to the fact that there is definitely this slowdown happening, which people expected in quarter 3, but maybe to a larger degree than was originally expected.

BRIAN SOZZI: Yeah, I don't have-- I don't think anything in here is positive, guys. I mean, we see inflation accelerating. We have companies cutting their sales outlooks. And excluding that inventory build, as Peter Boockvar had bleakly just sent out via email, there would really have been no growth in terms of this print. So I think these are very worrisome signs, especially as we enter the key holiday shopping season. I think it highlights everything we continue to hear about here, supply chain bottlenecks and inflation. Maybe not hyperinflation, Julie, but still.

JULIE HYMAN: Wait, am I reading this wrong? I thought we actually saw inflation decelerate in this report.

BRIAN CHEUNG: Well, I mean, I-- when you take a look at personal income, for example, I think disposable personal income continued to fall. I don't have the exact number in front of me. But that's going to point as a leading indicator to inflationary pressures.

This is one interpretation of it-- inflationary pressures abating soon, right? Because you have a lot of that personal income boost, which was really primarily in the first quarter because of the stimulus checks that went out, mostly fading in quarter 2, but continuing to fade in the third quarter, despite all these anecdotes of people going out and using the disposable personal income to buy goods, which, obviously, has been feeding a lot of the price increases as well. So if that trend does continue in future quarters, that actually would be more favorable to the team transitory argument.

JULIE HYMAN: OK, well, just the number that I'm looking at here, ex food and energy, the PCE Price Index was up 4 and 2% compared with 6.1% in the second quarter. But to your point, if part of that is coming because of lower increases in income, maybe that's not a positive thing. I don't know. We could talk about this all day, but we have other things to talk about. And by the way, also seeing some details come out of President Biden's new proposals for the US for his framework, his spending framework, including a minimum corporate tax.