Author: smarttalksucce

The U.S. economy grew at a 2% rate in the third quarter, its slowest gain of the pandemic-era recovery, as supply chain issues and a marked deceleration in consumer spending stunted the expansion, the Commerce Department reported Thursday.

Gross domestic product, a sum of all the goods and services produced, grew at a 2.0% annualized pace in the third quarter, according to the department’s first estimate released Thursday. Economists surveyed by Dow Jones had been looking for a 2.8% reading.

That marked the slowest GDP gain since the 31.2% plunge in the second quarter of 2020, which encompassed the period during which Covid-19 morphed into a global pandemic that resulted in a severe economic shutdown that sent tens of millions to the unemployment lines and put a chokehold on activity across the country.

Declines in residential fixed investment and federal government spending helped hold back gains, as did a surge in the U.S. trade deficit, which widened to a near-record $73.3 billion in August.

The drops mostly offset increases in private inventory investment, a meager gain in personal consumption, state and local government spending, and nonresidential fixed investment.

Consumer spending, which makes up 69% of the $23.2 trillion U.S. economy, increased at just a 1.6% pace for the most recent period, after rising 12% in the second quarter.

Spending for goods tumbled 9.2%, spurred by a 26.2% plunge in expenditures on longer-lasting goods like appliances and autos, while services spending increased 7.9%, a reduction from the 11.5% pace in Q2.

The downshift came amid a 0.7% decline in disposable personal income, which fell 25.7% in Q2 amid the end of government stimulus payments. The personal saving rate declined to 8.9% from 10.5%.

Federal government spending fell by 4.7%, which the Commerce Department said was due to a halt in services and processing for the Paycheck Protection Program, a pandemic-era initiative aimed at providing bridge funding to businesses impacted by the shutdown.

“Overall, this is a big disappointment given that the consensus expectation at the start of the quarter in July was for a 7.0% gain and even our own bearish 3.5% forecast proved to be too optimistic,” wrote Paul Ashworth, chief U.S. economist at Capital Economics. “We expect something of a rebound in the final quarter of this year — if only because motor vehicles won’t be such a drag and any negative impact from Delta should be reversed.”

In a separate economic report, jobless claims totaled 281,000 for the week ended Oct. 23, another pandemic-era low and better than the 289,000 estimate. The total marked a decrease from the previous week’s 291,000. Continuing claims fell by 237,000 to 2.24 million, and those receiving benefits under all programs dropped by 448,386 to 2.83 million.

Stock market futures remained higher after the report while government bond yields also climbed.

The July-to-September period saw a major clogging of the nation’s supply chain, which in turn dampened a recovery that began in April 2020 following the shortest but steepest recession in U.S. history.

Shortages in labor and soaring demand for goods over services contributed to the bottleneck, which is not expected to ease until after the holiday season.

Despite the Q3 weakness, economists largely expect the U.S. to bounce back in the fourth quarter and continue growth into 2022.

Another significant factor for the Q3 number was the summertime rise of the Covid delta variant, a situation that has reversed itself in much of the country. Consumer activity, particularly in the vital services part of the economy, appears to have picked up and could fuel a late-year growth burst.

“As Delta cases continue to subside, there may be more growth in the fourth-quarter as consumers will be more willing to spend on services involving in-person interactions,” said Dawit Kebede, senior economist at the Credit Union National Association. “The supply chain challenges, however, will likely continue until next year making it difficult to satisfy increased consumer demand.”

Companies during the current earnings season have noted the issues with supply chains, but many say customers are willing to pay higher prices. That in turn has helped fuel inflation, which is running close to its 30-year high and also is expected by most economists and Federal Reserve policymakers to cool next year.

Thursday’s data indicated that at least the pace of the inflation rise had taken a step back.

Core personal consumption expenditures, which exclude food and energy and are the preferred gauge by which the Fed measures inflation, rose 4.5%, a deceleration from the second quarter’s 6.1% increase but still well above the pre-Covid pace. The headline PCE price index increased 5.3% in Q3, down from 6.5% in the previous period.

Correction: The personal saving rate declined to 8.9% from 10.5%. An earlier version misstated the move.

Pending home sales, which are a measure of signed contracts to buy existing homes, fell an unexpected 2.3% in September compared with August, according to the National Association of Realtors.

Analysts were predicting a slight monthly gain. Sales were 8% lower compared with September 2020.

Pending sales are a forward-looking indicator of closed sales in one to two months.

Sales may have dropped due to higher mortgage rates. The average rate on 30-year fixed-rate mortgages fell below 3% in July and stayed there until the first week of September, according to Mortgage News Daily. Then it began rising and crossed over 3%, ending the month at 3.15%.

Buyers are also still contending with very high home prices. Price gains have been close to 20% year over year. There was a sign, however, in August that the market was cooling, with fewer bidding wars and slightly more supply coming up for sale.

“Contract transactions slowed a bit in September and are showing signs of a calmer home price trend, as the market is running comfortably ahead of pre-pandemic activity,” said Lawrence Yun, NAR’s chief economist. “It’s worth noting that there will be less inventory until the end of the year compared to the summer months, which happens nearly every year.”

Regionally, pending sales in the Northeast fell 3.2% month over month and were down 18.5% from a year ago. In the Midwest, sales dropped 3.5% for the month and 5.8% annually.

Sales transactions in the South decreased 1.8% for the month and 5.8% from September 2020. In the West sales fell 1.4% monthly and 7.2% from a year ago.

Mortgage rates have been on a tear this month, rising yet again last week to the highest level in eight months, according to the Mortgage Bankers Association. That caused mixed demand for mortgages last week, resulting in no change from the week before.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.30% from 3.23%, with points decreasing to 0.34 from 0.35 (including the origination fee) for loans with a 20% down payment. That rate was 30 basis points lower one year ago.

As a result, refinance demand fell 2% week to week, seasonally adjusted. Volume was 26% lower than the same week one year ago. The refinance share of mortgage activity decreased to 62.2% of total applications from 63.3% the previous week.

“The increase in rates triggered the fifth straight decrease in refinance activity to the slowest weekly pace since January 2020. Higher rates continue to reduce borrowers’ incentive to refinance,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a release.

Mortgage applications to purchase a home increased 4% for the week but were 9% lower than the same week one year ago. As home prices continue to rise, and most of the sales are in higher price tiers, the average loan size rose to its highest level in three weeks.

“Both new and existing-home sales last month were at their strongest sales pace since early 2021, but first-time home buyers are accounting for a declining share of activity,” added Kan.

The latest read on home prices from S&P Case-Shiller showed prices up nearly 20% nationally, but the annual gain, which has been rising steadily for the past year, did not change from the previous month. That could be a sign that higher mortgage rates are taking at least a little bit of the heat out of prices.

Mortgage rates edged down slightly to start this week, but that could just be a brief reprieve before next week. The Federal Reserve is widely expected to announce next Wednesday that it will taper its purchases of mortgage-backed bonds. That should send rates even higher.