Speed Bumps Along the Way
This past week had a good deal of news flow, with highlights being the release of the third quarter GDP and earnings results out of each of the big five tech companies.
On Thursday, the Bureau of Economic Analysis announced that third quarter gross domestic product (GDP) grew 2.0%. This was a more restrained rate of growth compared to 6.7% in the second quarter. Earlier in the third quarter, expectations were for more robust growth, something more consistent with the second quarter. The slowdown in the pace of the economy was ultimately hampered by supply chain constraints, which have been a top headline for much of the past few months.
Source: Bureau of Economic Analysis
There were several factors fueling the slowdown in the rate of economic growth. First, there was a slower pace of personal spending, largely driven by lower sales of durable goods such as autos. We’ve seen challenges with new car production occurring for months, and this quarter it proved to be a headwind. Second, residential construction slowed for the second straight quarter due to challenges in obtaining the requisite inventory. The U.S. trade deficit, which is 45% greater than what it was at the end of 2019, also served as a governor on GDP growth.
While the sizable slowdown in the rate of economic growth might sound alarming, we see encouraging trends through a vast majority of the economy. Personal consumption remains above pre-COVID levels, with spending on services nearly returning to what it was in 2019. Non-residential investment remains high, along with state and local government spending. Given how strong economic trends have been in 2021, it’s hard to sustain growth at these rates.
The other notable bit of information came out of third quarter earnings releases from the five big internet companies. Shares of both Microsoft and Google reacted positively to their better-than-expected results. Facebook disappointed as it provided a more cautious outlooked based on changes in Apple’s tracking and notification policies. Facebook also announced a whopping $50 billion share repurchase authorization and at week’s end changed its name to Meta Platforms. Toward week’s end, Amazon and Apple both reported sales that disappointed investors elevated expectations.
All told, big tech’s earnings weren’t bad but collectively did not live up to the hype. Reflecting on what we learned about conditions through this week’s economic releases and corporate earnings, it clear that conditions are hitting a speed bump. Modest challenges are surfacing but aren’t enough to derail progression. They are, however, enough to slow things down a bit and create an environment where we may start to see industries and companies beginning to move at different speeds.
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