October 29, 2021
The 2.0 percent growth figure reported for the third quarter was widely viewed as disappointing. It was slower than most analysts had expected and certainly a large falloff from the 6.7 percent rate in the second quarter, but on the whole, it should be viewed as a positive report.
There are two key reasons for why I see the report as largely positive. First, there were extraordinary and temporary factors that prevented the growth from being considerably more rapid. Second, we need to get a fuller picture in assessing growth. In the pre-pandemic period, no one would have considered 2.0 percent growth particularly bad. It averaged 2.5 percent in the three years preceding the pandemic. We are already above the pre-pandemic level of GDP, although somewhat below the trend rate of growth, which means we are through the period where we would ordinarily anticipate extraordinary growth.
The Temporary Factors
The two major temporary factors slowing growth in the third quarter were supply chain problems and the pandemic. The supply chain problems have been widely reported. There are ships sitting offshore at our major ports waiting to unload cargo. The problem is that ports are overloaded as there has been a sharp increase in demand for goods during the pandemic. Since many of these goods are imported, this means more ships need to be unloaded.
The problem is not just one of unloading at the ports. The transportation companies that move the cargo to warehouses across the country are unable to meet the increased demand for their services.
A big part of this story is that they don’t have the truckers to move the freight. Several decades ago, trucking was a relatively high-paying industry for workers without college degrees. This was in large part due to the fact that it was a heavily unionized industry. The Teamsters union was very effective in raising the pay and improving the working conditions for truckers.
However, in the last four decades, trucking deregulation coupled with anti-union policies by employers, which often had the support of the government, substantially weakened the Teamsters. As a result, wages stagnated. The real hourly wage for a trucker, just before the pandemic, was 5.0 percent below its level in 1990. Also, without a strong union to back them up, truckers were often forced to work long and irregular hours and to drive unsafe trucks.
As a result, quit rates in the industry soared, peaking at 3.3 percent in April, 40 percent higher than the prior peak. The sector now reports a job opening rate of 7.8 percent, two and a half times the 3.3 percent peak in 2001, when the economy was still experiencing the Internet boom.
It is worth noting that the bottlenecks due to a lack of trucking capacity have little to do with whether we import our goods or produce them domestically. In either case, they must be moved from the place they are produced to the stores or Internet retailers that will eventually sell them to consumers.
The fact that we now import many of our manufactured goods is not the main source of our problems. The backlog of goods is showing up on our ports because that is where the goods come in. If we instead produced everything domestically, and our trucking sector was in no better shape, then we would see the goods piling up outside of Detroit, Milwaukee, and other major manufacturing hubs.
It is easy to see the impact of the supply chain problems in the third-quarter GDP data. Vehicle sales fell at a 53.9 percent annual rate in the quarter, subtracting 2.4 percentage points from the quarter’s growth. This was not due to people not wanting to buy cars, this was due to the fact that the cars were not there to be sold. This also showed up on the investment side, as transportation equipment sales fell at an 18.6 percent annual rate, subtracting another 0.2 percentage points from third-quarter growth.
Supply chain problems showed up in a number of other areas such as the 7.3 percent annual rate of decline in the sales of recreational goods and vehicles and the 7.7 percent decline in residential construction. The latter was primarily the result of a shortage of building materials, which crimped construction even as homebuilders report being highly optimistic about continuing demand in the market.
Clearly, third-quarter growth would have looked considerably better if our supply chains had been operating normally. This fact should mean that future quarters will look considerably better. If fourth-quarter growth is exactly the same in all other areas, and fourth-quarter sales of cars and transportation equipment just remains at third-quarter levels, we would see fourth-quarter growth of roughly 4.6 percent. Of course, that scenario is not plausible, but the point is that the supply chain problems we are seeing now, set up a situation in which we can anticipate stronger growth in future quarters.
The other major factor slowing growth in the quarter was the surge in the pandemic due to the delta variant. This hampered growth but not in the ways that many seem to believe. Restaurant sales grew at a very healthy 5.9 percent annual rate. In places where the pandemic hit hardest during this period, people did not stop going to restaurants. Data from Open Table show Florida’s reservation numbers were consistently above their pre-pandemic level.
The pandemic had a much bigger effect on foreign travel to the United States, which fell slightly in the quarter and is running at around 30 percent of pre-pandemic levels. This drop-off is due to both fear of the pandemic and also legal restrictions on entering the United States.
The other way the pandemic affected third-quarter GDP was by preventing people from working. In September, 1.6 million people, just over 1.0 percent of the workforce, reported that they were not working or looking for work in the month because they were caring for someone who was sick or were sick themselves. As caseloads continue to fall, we can expect that these people will return to the labor market.
Thinking About Growth: What Are We Missing?
When we look at the categories of output that are most below their pre-pandemic growth path, several obvious ones stand out. First, expenditures on non-residential structures are more than 21.0 percent below their level from the fourth quarter of 2019. This is largely a story of fewer office buildings and stores being built, although factory construction is also down.
The big factor here is that we are seeing a large increase in work from home, which means that less office space is needed. In many major cities, less than half of the pre-pandemic workforce is back in their office. The other issue is that we have seen an explosion in online sales in the pandemic, which means that less retail space is needed.
On the consumption side, real expenditures on services are still 1.6 percent below their pre-pandemic level. There are several items that stand out here. Expenditures on health care services, which had been rising rapidly, are 1.0 percent below their pre-pandemic level. There is a grim, but obvious explanation for this decline, we have seen almost 900,000 people die due to the pandemic. (This is the excess death figure, which includes many people not identified as having died from Covid.)
The people who died were disproportionately the elderly and those with serious health issues. This shows up clearly in expenditures in nursing homes, which are down by 9.1 percent from their pre-pandemic level. On a per-person basis, these people required far more medical care than the average person, so there is now less need for health care.
On a more positive note, there has been an explosion in telemedicine, as many people are able to have consultations with doctors and other health care professionals remotely. This is a great innovation, which likely reduces the cost of medical services and saves the expenses associated with traveling to get health care.
Another major factor in the drop in service consumption is the drop in expenditures associated with going into work. This shows up most clearly with spending on ground transportation, which is down by 31.1 percent from the fourth quarter of 2019. It also shows up with the 26.7 percent drop in expenditures on personal care services, like hair salons and dry cleaning.
The drop in the provision of these services does not really represent a decline in well-being. If people don’t have to commute to go to work, they are not worse off as a result of not having the car or train trip to work. Similarly, if they don’t have to clean their business clothes because they are not wearing them, this is not likely to be viewed as a loss by most people.
People can argue that it’s fine if we don’t need some of the goods and services associated with our pre-pandemic lifestyles, but these resources should be redeployed elsewhere. This is true, but it is also an adjustment that takes time. We can’t reasonably expect that large shifts in the economy can be accomplished overnight, especially when we are still feeling the effects of the pandemic.
We also should recognize the reduction in work-related expenses as effectively an increase in our standard of living. If we can have the same amount of goods and services that we value, without having to pay costs associated with going to work in an office (including our time), this is a gain in well-being. It doesn’t get picked up in our national income accounts because we treat these expenses as final consumption, instead of the intermediate goods that they in fact are.
The Great Reshuffling
The third-quarter GDP numbers should be seen as evidence of an economy in the middle of a major transition. A 2.0 percent growth figure is not bad for an economy that has fully recovered the ground lost in the recession, but we are virtually certain to see stronger numbers in the quarters ahead. We will work through the backlog of goods sitting in our ports, which will not only mean more consumer goods, but also more intermediate goods needed in a wide range of production processes.
This will not only mean more output, but it will also likely mean sharply lower prices for many items, especially cars. There is nothing about the production process that would lead the price of a car to be far higher in 2021 than in 2019. Once something resembling normal production has resumed, we should see prices fall back to their pre-pandemic level. The Fed of course is fully aware of this fact, which is why it is not anxious to start jacking up interest rates, in spite of the rants of the inflation hawks.
We will also see a major reshuffling in the labor market. Businesses that are having a hard time attracting workers will raise wages enough to get the workers they need. This will inevitably mean that some businesses will fail since they aren’t able to pay higher wages. This is unfortunate, but that is the way capitalism works. This is the reason half of our workforce is not still employed in agriculture; workers got higher pay in factories and the farms went under.
It is also important to recognize the dynamics involved here. A restaurant that is struggling to stay open, when only half-staffed, eventually goes under, which means that its former employees will be looking for jobs elsewhere. This process is likely to lead to fewer workers employed in many low-paying sectors, like restaurants, but likely at higher wages.
Finally, it is also important to mention how the bills before Congress will affect this picture. Assuming that both the reconciliation and infrastructure bills eventually get signed into law, they will provide a basis for further re-orienting the economy away from its pre-pandemic course. The infrastructure package will pull workers into the repair and improvement of the infrastructure. The incentives in both bills should create millions of jobs producing clean energy and electric cars. And, the additional money for pre-kindergarten and childcare should allow these sectors to offer more competitive wages.
In short, the third-quarter GDP may not have been as strong as we might have hoped, but it was very far from the disaster some have painted. The future is still looking good, if we can ignore global warming and the fascist threat.