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U.S. Economy Slowed in Third Quarter as Delta Variant Surged

Economic growth slowed sharply over the summer, the government reported Thursday, reflecting the resurgent pandemic’s impact in keeping consumers at home and the supply-chain bottlenecks that led to empty shelves and higher prices.

The outlook for the rest of the year is mixed: The pandemic’s grip is easing. The supply-chain issues, by and large, are not.

Gross domestic product, adjusted for inflation, grew 0.5 percent in the third quarter, the Commerce Department said. That was down from 1.6 percent in the second quarter and represented the weakest growth since the recovery from the pandemic began in the spring.

As recently as July, economists predicted that the recovery would gain steam in the second half of the year as widespread vaccination allowed students to return to schools, workers to return to jobs and consumers to return to restaurants and hotels.

“At the time, the recovery looked on track, and it looked like it was going to pick up,” recalled Ben Herzon, executive director of IHS Markit, a forecasting firm. “Based on how things were looking, it could only get better.”

But that was before the spread of the Delta variant led to a new wave of coronavirus cases across much of the country, and before the full impact of global supply-chain snarls became clear.

The good news for the economy is that the direct damage done by the Delta variant was relatively modest and has begun to fade. Spending at hotels and restaurants rose in the third quarter, although more slowly than earlier in the year. More recent data from OpenTable, the restaurant-reservation app, and the Transportation Security Administration suggest that dining and air travel have begun to rebound as virus cases have fallen.

The bigger factor in the summer slowdown was the supply-chain issues that have made it hard for U.S. stores and factories to get the products and parts they need. Spending on goods fell 2.4 percent in the third quarter, adjusted for inflation, led by a steep drop in sales of cars and other long-lasting manufactured goods.

Economists always expected goods spending to fall somewhat as the effect of government aid checks sent out earlier this year waned and as pandemic-driven shifts in spending patterns began to return to normal. But they said the big drop in the third quarter almost certainly reflected supply-chain problems. Falling auto sales — a result of a global microchip shortage that has crimped car production — accounted for about 90 percent of the overall decline in goods spending.

Automakers said this week that they expected the chip shortage to improve gradually. But there is little sign that broader supply chain problems will disappear anytime soon.

“In some places, things may be getting worse before they get better, in some areas they may be stabilizing before they get better,” said Robert Rosener, senior U.S. economist at Morgan Stanley. “It’s a very mixed picture, but there’s nothing that’s signaling immediate relief.”

Most forecasters expect G.D.P. growth to pick up somewhat in the final three months of the year, but few expect a strong enough rebound to make up for the third quarter’s disappointing results.

Still, the economy is in much better shape than forecasters expected for most of last year. Gross domestic product returned to its prepandemic level in the second quarter, although it has not caught up to where it would be if the pandemic had never occurred. Government aid, along with reduced spending during the pandemic, has left Americans flush with cash, which should support spending for the rest of the year — as long as retailers have goods to sell them.

“We want to put this in perspective: Why is the United States in these conditions? Because the economic recovery is so strong,” said Beth Ann Bovino, chief U.S. economist for S&P Global. “The problem is that businesses can’t make product fast enough to meet demand.”

The combination of strong demand and limited supply is pushing up prices. Consumer prices rose 1.3 percent in the third quarter, slightly slower than in the previous quarter but still well above the prepandemic rate. Prices were up 4.3 percent from a year earlier.

In government statistics, faster price increases result in slower inflation-adjusted growth: Consumers are spending just as much but getting less in return.

The combination of faster inflation and slower growth is causing headaches for policymakers. Normally, when the economy slows, the government and the Federal Reserve can stimulate activity by cutting interest rates or giving cash to households. But those tools don’t help when the problem is with supply, not demand.

President Biden argues that his economic agenda, including infrastructure spending and child care assistance, will lead to faster shipping and a larger work force, but those policies, if they work, will take years to have a significant effect.

In the shorter term, the Federal Reserve has signaled that it will begin pulling back support for the economy as early as next month, in part because supply-chain issues have led to faster inflation.

“Bottlenecks and tangled supply lines are holding down activity in some sectors, particularly automotive,” Jerome H. Powell, the Fed chair, said during a virtual speech last week. He added that “the combination of strong demand for goods and the bottlenecks has meant that overall inflation is running well above our target.”

Officials still expect the factors forcing inflation higher to abate as the virus fades and supply chains return to normal, Mr. Powell noted, but he signaled wariness and a recognition that getting back to business as usual could take time.

At 360 Painting, a residential and commercial painting company with 120 franchises across the country, business soared during the pandemic as homeowners looked to freshen up their houses during lockdown. Demand has stayed strong this year, but the company is facing an unexpected challenge: a shortage of paint.

“In 25 years of home service work and painting work, I’ve never seen anything like this where you go into a paint store and they’re out of paint,” said Dave Rychley, the company’s president.

At first, Mr. Rychley said, he expected the problem to be brief. But as it has dragged on, the company has had to adjust, warning customers to expect delays and pushing them to choose paint colors early to make sure they can secure supplies in time. Franchisees have also been raising prices.

“If we’re paying more for a gallon of paint, we’re going to pass that on to the customer at some level,” Mr. Rychley said.

The company is also facing another supply shortage: labor. For many franchisees, Mr. Rychley said, finding skilled workers is even harder than finding paint.

Economists say the labor shortage may begin to ease as the Delta variant fades and more Americans feel comfortable returning to work.

But it will take time to unravel the web of disruptions that the pandemic has caused in supplies of goods and labor, said Constance L. Hunter, chief economist for KPMG, the accounting firm. Many parents, for example, can’t return to work until they can get reliable, affordable child care — but child care centers are facing their own staffing crisis.

“That’s a chicken-and-egg problem,” Ms. Hunter said.

The snarled supply chain is partly a result of higher spending on goods during the pandemic, as Americans bought cars instead of plane tickets, workout equipment instead of gym memberships and cooking equipment instead of restaurant meals. Those patterns have begun to reverse as the pandemic has ebbed, but not all the way, in part because the pandemic itself has not receded fully.

“Once the pandemic is in the rearview mirror in the United States, we are not going to keep consuming goods at this pace,” Ms. Hunter said. “But Covid has lasted much longer than people anticipated.”

Jeanna Smialek contributed reporting.

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