Economic Outlook

GDP Disappoints, Inflation Surges, but the Recovery Grinds On

  • Real GDP at 2.0% for Q3 is a major decline from the 6%+ rates in the first half of 2021.

  • Delta COVID and supply constraints were the primary factors.

  • CPI surged to 6.2% in October; inflation looking stickier, less “transitory.”

  • Manufacturing holding up despite supply and labor constraints.

  • Improvement in services spending continues.

  • Robust growth still probable for ’21 and ’22 despite real challenges.

Written by Philip Rich, Chief Investment Officer


Real GDP grew at the disappointing rate of 2.0%, in the third quarter, down from 6.3% and 6.7% in the first and second quarters, respectively. The primary causes of the lackluster result were a resurgence of the COVID Delta variant in many parts of the country and supply constraints. Personal consumption, the largest driver of GDP, was up only 1.6%, fixed investment spending was actually down. Durable goods spending was down a remarkable 26.2%; spending on services was up a strong 7.9%. Spending on goods had remained strong through the worst of the pandemic, which brought forward a measure of demand that has now been met. Services, much of which are often delivered in-person, were very adversely impacted by COVID and are now improving at a rapid pace. Well publicized supply shortages of all types have limited growth in both goods and services. The rotation back toward spending on services, which comprise a larger part of the US economy than goods, should provide scope for more robust growth in Q4 and through 2022. Although the US economy is larger than it was pre-COVID, it is almost certainly not where it would have been had the pandemic never occurred. Many of the logistical factors that are currently constraining growth are also opportunities for growth and efficiency improvements in the future. As an example, today it costs seven times more to move a 40ft. container across the Pacific than pre-COVID, and throughput is poor. Enterprising shippers should eventually find this to be a lucrative problem to solve, though doing so requires time and investment.

The US economy is in recovery and is growing.  Many of the factors that produced the disappointing GDP number appear limited to the third quarter.  More current “real time” data suggest that 2021 may end quite strong – a 5.4 to 5.8% growth rate for 2021 is quite achievable.  Demand is strong, however many of the factors limiting growth will not be resolved quickly or easily. 
Source: U.S. Bureau of Economic Analysis, 


Payrolls rose a robust 523K in October after two months of comparatively sluggish growth. Unemployment ticked down to 4.6%, but too much of the progress in unemployment is coming from a contraction in the overall workforce. Labor force participation at 61.6% is 1.7% below its pre-pandemic level and the employment-population ratio at 58.8% is meaningfully below the 61.1% level, pre-COVID. These declines appear small, but small moves in these very broad measures of employment represent millions of working-age people who are not visibly participating in the economy by either working or actively seeking employment. In the meantime, labor “shortages” continue to limit growth in the US economy. The number of working-age people actively participating in the labor force is smaller by some 4.3 million workers than before the pandemic. Meanwhile, employers everywhere report serious challenges filling open positions. The Bureau of Labor Statistics (the “BLS”) reports 40% more job openings than unemployed persons. The quit level and the quit rate reported by the BLS have both hit an all-time high.

One of the very challenging outcomes of the pandemic is a noticeable change in the implicit contract between employer and employee. The glue of loyalty that normally works both ways appears to have been weakened.  The trauma of pandemic may be deeper and more durable than we have appreciated, and it may be evident in the employer-employee relationship. Employees are clearly more willing to move for improved pay, benefits, or conditions.  Employers are having to offer higher starting wages and signing inducements to fill open positions. Retirement-age employees are accelerating their departures from the workforce, reversing a long trend of older employees staying on the job. Generous unemployment benefits, challenges finding childcare and a deep rethink of the work-life balance are all factors in the contracting workforce. Some jobs lost in this cycle will not return, requiring retraining and relocating some number of workers to effectively fill jobs, a process that requires time. Better pay at the lower end of the wage scale could bolster the consumer economy, but it will also make the cost of goods and services more expensive.
Source: U.S. Bureau of Labor Statistics,


The Consumer Price “all items” Index increased 6.2% for the 12 months ending in October, the largest such increase since 1990. Core CPI (less food & energy) was up 4.6%, also the biggest annual jump since the early 1990’s. The energy index is up 30% over the last 12 months, food is up 5.3%. Evidence of inflation is widening out through the economy and is no longer pinned only to supply issues. In the debate between “transitory” and “durable” inflation, durable is gaining ground. The Employment Cost Index was up 1.3% in the third quarter, the largest such increase since 2001. Employment costs are up 3.7%, compared to last year. Hourly earnings are up 10.8% in Leisure & Hospitality, 6.0% in Transportation & Warehousing and 5.8% in Education & Health Services. Inflation in wages and employment can be especially concerning because increases in employment costs can be an important component in completing the feedback loop between wages and the cost of living. However, please remember that the last recovery was sometimes scorned as the “wageless” recovery and increases in hourly wages, particularly at lower income levels, translate efficiently into increases in consumer spending.

With aggregate economic demand strengthened by aggressive stimulus programs, as well as a broadening recovery, and supply constrained by logistical challenges and shortages, rising prices are playing their classical role of keeping these two economic forces somewhat in balance. Although it is now reasonable to assume that many of the forces currently driving inflation will persist into 2022, we cannot discount the possibility that gradual improvements in the supply chain and improved availability of workers will help decelerate inflation in the future.  
Source: U.S. Bureau of Labor Statistics,

Interest Rates

With the economy still fragile, interest rates near record lows and millions absent from the workforce, the Federal Reserve finds itself on the horns of a tough dilemma. Phasing out their bond purchases, which had been running at $120 billion per month, was the easy call and that process is under way. The decision of how and when to begin raising rates is much tougher and will probably be put off until well into next year. Elements of the dilemma are classic: raise rates too soon and the recovery may stall, too late and inflation could accelerate. But the details are unique to this cycle. COVID is much closer to being a controlled threat, but a new variant or new wave could occur with little warning, impacting economic growth. Rate-sensitive areas of the economy, such as housing, are typically easy to cool with rate increases when over-heated, but there is evidence that the US is still running deficits in its housing stock. Some elements presently contributing to inflation may not be rate-sensitive at all. Raising rates certainly cannot counter any of the direct impacts of COVID or pull people back into the workforce. They cannot resolve supply shortages or logistical logjams. Raising rates can make buying a car more costly, but that assumes you can find a car to buy. All of these things are currently part of the inflation picture.
Source: Board of Governors of the Federal Reserve System (US),


Stock valuations remain elevated. The price/earnings multiple of the S&P 500 currently stands at 29.5 versus a long-term average of 15.95.  Bond yields remain low and many bonds trading in the secondary market are trading at stiff premiums. Commodities have been on a run. It is difficult for investors to find an asset class that looks attractive from a valuation standpoint.  High valuations, by themselves do not presage a market decline, however they can limit future returns. Improved earnings could provide stocks with fundamental support, and there is certainly scope in this economy for improvements in throughput and efficiency.  Such improvements would translate into stronger earnings.  Investors should remain conscious of valuations and mindful of downside protection. Investors seeking income may support cash flows by diversifying into preferred stock, certain types of REITS or dividend-paying shares. None of these have the same characteristics as bonds but can support a need for cash flow in a portfolio at a lower level of risk than many momentum-driven investments.
Source: S&P Dow Jones Indices LLC,

As always, if we can be of assistance to you in navigating these challenges, please do not hesitate to contact us.

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Nora Bagby

Director Private Banking Sales & Service

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Ben Johnson, CFA

Senior Portfolio Manager and Client Service Manager

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Lance Hopegill, CFP

Chief Fiduciary Officer

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Adam Martin, CFA

Senior Portfolio Manager

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Philip Rich

Chief Investment Officer

This information is for informational purposes only and does not constitute investment advice.


  • GDP – Bureau of Economic Analysis
  • Employment & Inflation – Bureau of Labor Statistics
  • Interest Rates – Federal Reserve
  • P/E S&P 500 –

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