US 3Q 2% Economic Growth Is Temporary... Inflation Persistence Is Key

3Q Growth Slowdown Temporary...Many Forecast 4Q Growth Recovery
High Inflation Likely to Persist
Fed Early Rate Hike Possibility Spreads

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] Ahead of the Halloween festival at the end of this month, American stores are focusing on selling Halloween products such as cosplay items and pumpkins.

A week before Halloween, the Halloween cosplay product stores in New York City and New Jersey visited by the reporter were crowded with people.

Parents holding their children's hands visited the stores and opened their wallets generously, and young people were also busy purchasing items to dress themselves up.

Stores preparing for the year-end shopping season were conducting on-site interviews to hire temporary staff to fill labor shortages. Electronics retailers, which had many empty spaces until summer, were now filled with TVs.

This is why there is a forecast that although the U.S. third-quarter economic growth rate sharply declined due to the spread of the Delta variant of COVID-19 and supply chain bottlenecks, growth will expand again in the fourth quarter.

The U.S. Department of Commerce announced on the 28th (local time) that the third-quarter Gross Domestic Product (GDP) growth rate was recorded at an annualized 2%. This figure is less than one-third of the 6.7% growth in the second quarter.

The third-quarter growth rate fell far short of the 2.8% expert forecast compiled by Dow Jones. The market had expected the lowest growth since the early days of the COVID-19 crisis, but the situation turned out to be worse.

It is analyzed that spending decreased due to reduced travel caused by the spread of the Delta variant, and global supply chain bottlenecks hindered U.S. economic growth. The Wall Street Journal evaluated that the disappearance of government stimulus measures and vaccination effects, which had driven economic growth in the first half of the year, also had an impact.

The WSJ noted that consumer spending increased by 1.6% in the third quarter, sharply slowing from the 12% increase in the previous quarter, but this was understood as a phenomenon caused by a shortage of automobile supply. Furthermore, since service spending grew by 7.9% annually in the third quarter, it is judged that growth could return to an upward trend.

In particular, there is a dominant expectation that shopping and travel will increase this year-end. The WSJ reported that consumers are expected to increase spending during this year-end holiday season and companies are also expected to increase investments, accelerating growth again.

Karl Tannenbaum, Chief Economist at Northern Trust, explained, "Although there were temporary obstacles due to the resurgence of COVID-19, the situation will improve in the fourth quarter."

Data tracking consumer movements also predicts an expansion in consumption. According to STR, a hospitality data analytics company, the U.S. hotel occupancy rate was 65% during the week ending October 16, the highest level since mid-August.

According to OpenTable, a restaurant reservation service, the number of restaurant reservations during the week ending October 28 decreased by 4% compared to the same period in 2019, but the decline was significantly smaller than in September.

James Knightley, an economist at ING, said, "As the spread of the Delta variant slowed, flights, restaurant dining, and hotel stays increased," and predicted that the fourth-quarter growth rate would be much better than the third quarter.

Professor Son Seong-won of Loyola Marymount University shares the same view. Professor Son forecasted, "Consumer confidence has shown signs of improvement. Consumers have saved enough for spending. Growth in service sectors such as travel, leisure, and healthcare will continue."

There are also opinions that more attention should be paid to rising inflation and stagflation rather than growth.

Professor Son said that although 1970s-style stagflation is unlikely to occur in the near future, "As the word stagflation is mentioned more frequently, market interest will shift from economic growth to inflation."

With the Consumer Price Index (CPI) rising by as much as 5.4% in September, the Personal Consumption Expenditures (PCE) price index, which the U.S. Federal Reserve (Fed) closely monitors for monetary policy, will be released on the 29th. August's PCE rose by 4.3%, and if the upward trend continues in September, the pace of monetary policy normalization could accelerate.

CNBC reported that as inflation rises, the market perception that the Fed will hasten interest rate hikes is spreading.

According to the FedWatch of the Chicago Mercantile Exchange (CME), the probability of the first rate hike occurring in June next year is 65%, the second hike in September is 51%, and the third hike in February 2023 is 51%.

The Fed is expected to hold its regular Federal Open Market Committee (FOMC) meeting on November 2-3, announce a decision on tapering asset purchases, and begin monetary policy normalization.