The U.S. economy grew at the slowest pace of the recovery in the third quarter, but economists expect strong consumer demand and an easing pandemic to boost growth in the coming months despite lingering supply constraints.

Gross domestic product grew at a seasonally adjusted annual rate of 2.0% from July to September, the Commerce Department said Thursday, marking the weakest quarter of growth since the recovery began in mid-2020.

Growth was hit by two big factors: a surge in virus cases due to the highly contagious Delta variant of Covid-19 and deepening supply bottlenecks affecting goods from autos to food. Dynamics that helped GDP grow at a historically fast rate in the first half of this year—government stimulus, widespread business reopenings and rising vaccination rates—also faded.

Consumers have the appetite to spend: Spending on services last quarter grew at an annual rate of 7.9%. Limited availability of some products, particularly long-lasting goods such as vehicles, restrained overall spending. Consumer spending rose at an annual rate of 1.6% in the third quarter, a sharp slowdown from a 12% increase in the prior quarter.

Supply-chain disruptions such as backups at U.S. ports and overseas manufacturing disruptions contributed to a rapid increase in inflation and pose a risk to the economic outlook. Still, economists are forecasting a reacceleration in growth as consumers spend lavishly this holiday season and businesses increase investment. Unemployment claims are also at pandemic lows because employers are avoiding layoffs amid worker shortages.

“We had a temporary set of impediments coming from a resurgence of the coronavirus that should ease as we move through the quarters ahead,” said Carl Tannenbaum, chief economist at Northern Trust.

Consumers are venturing out more this fall. U.S. hotel occupancy was at 65% for the week ended Oct. 16, the highest level since mid-August, according to data from STR, a global hospitality data and analytics company. In the week ended Oct. 28, the number of diners seated at restaurants was down 4% from the same period in 2019—before the pandemic—a less severe decline than in mid-September, according to reservations site OpenTable.

As the pandemic eased over the past month, business picked up at Tamale Addiction, said Adrian Paredes, co-owner of the company in the Austin, Texas, area. That marked a shift from over the summer, when the Delta variant caused the cancellation of several events where the vendor would normally sell its organic tamales.

In early October at the Austin City Limits Music Festival, Tamale Addiction sold 18,000 tamales of various flavors including pork with tomatillo sauce, chicken with mole sauce, beans with goat cheese, and spinach with caramelized onions. Crowds flooded the event, Mr. Paredes said.

“I saw people gathering with joy,” he said. “It was a normal event.”

Mr. Paredes recently started receiving more requests for food trucks to serve workers who are back at the office. People are also ordering tamales for events such as Halloween parties. He expects sales to be stronger at the end of this year compared with last year.

Shoppers are well-positioned to open their wallets this holiday season because of rising wages and savings amassed from several rounds of federal stimulus.

In the third quarter, private-sector inventories added 2.07 percentage points to GDP growth, an improvement from the preceding months. Still, businesses have a long way to go to rebuild inventories after massive drawdowns this year.

Supply constraints—including supply-chain disruptions and a shrunken workforce—might prove long-lasting and an impediment to economic growth in the months ahead. Several large companies in recent earnings discussions said supply issues could hamstring robust demand during the holiday season.

Toy companies are racing to get all their products onto shelves before Christmas, when the industry typically logs about half of retail sales for the year. Large manufacturers such as Hasbro Inc. and Mattel Inc. said they were able to overcome the supply-chain disruptions and get their products to retailers, albeit a bit later in some cases.

United Parcel Service Inc. executives said Tuesday that strong economic growth around the globe is keeping demand for its shipping services high. That is allowing the company to raise prices. UPS is keeping an eye on macroeconomic challenges, including inflation, inventory levels and labor shortages.

“Despite these challenges, consumer demand is expected to be strong during peak season and in the fourth quarter,” UPS Chief Financial Officer Brian Newman said.

Posted in: USA