Delta variant likely slammed brakes on US economic growth in third quarter

The U.S. economy likely grew at its slowest pace in more than a year in the third quarter as COVID-19 infections flared up, further straining global supply chains and causing shortages of goods like automobiles that almost stifled consumer spending.

The Commerce Department’s advance gross domestic product report on Thursday is also expected to show strong inflation, fueled by the economy-wide shortages and pandemic relief money from the government, cutting into growth. Ebbing fiscal stimulus and Hurricane Ida, which devastated U.S. offshore energy production at the end of August, also weighed on the economy.

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But there are signs that economic activity picked up towards the end of the quarter amid declining coronavirus cases driven by the Delta variant.

“Delta is the biggest reason why we have this noticeable deceleration,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “We’re going to see growth re-accelerate in the fourth quarter and the first half of next year as the effect of the Delta variant begins to wane. It doesn’t mean that we won’t have future waves of COVID, but with each passing wave, the economic costs continue to diminish.”

Carlos Hernandez and Hector Torres install an aluminium roof at Look Trailers cargo trailer manufacturing facility in Middlebury, Indiana, U.S., April 1, 2021. Picture taken April 1, 2021. REUTERS/Eileen T. Meslar (Reuters)

GDP growth likely increased at a 2.7% annualized rate last quarter, according to a Reuters survey of economists. The poll was, however, conducted before the release of data on Wednesday showing a sharp widening in the goods trade deficit in September amid a slump in exports.

The biggest goods trade deficit on record prompted some Wall Street banks to cut their GDP growth estimate, including Goldman Sachs, which trimmed its forecast by half a percentage point to a 2.75% rate. The Atlanta Federal Reserve trimmed its already low forecast to a 0.2% pace from a 0.5% rate.

DURABLE GOODS ORDERS POST FIRST DROP SINCE APRIL

Regardless of the actual number on Thursday, the economy’s performance last quarter was probably the weakest since the second quarter of 2020, when it suffered a historic contraction in the wake of stringent mandatory measures to contain the first wave of COVID-19 infections. The economy grew at a 6.7% rate in the second quarter. The Delta variant worsened labor shortages at factories, mines and ports, gumming up the supply chain.

The anticipated meager growth is seen coming mostly from a moderate pace of inventory drawdown. Overall inventory accumulation likely remained weak owing to shortages, especially of motor vehicles. Outside the shutdown in spring 2020, September was the worst month for motor vehicle production since 2010 because of a global shortage of semiconductors.

In this July 21, 2021 photo, a consumer shops at a retail store in Morton Grove, Ill. (AP Photo/Nam Y. Huh) (AP Photo/Nam Y. Huh / AP Images)

“The largest boost to GDP should come from a slower drawdown of inventories compared to in the second quarter, as supply…