The third-quarter GDP report highlighted the negative impact supply chain disruptions across the world are having on U.S. economic activity and prices. Real GDP increased at an annual rate of 2.0% in the third quarter, lower than the 2.6% markets expected after 6.7% growth in the second quarter. Factoring in inflation, current-dollar GDP increased 7.8% in the third quarter after an astonishing 13.4% rise in the second quarter on surging inflation. But while the U.S. economy has slowed dramatically from skyrocket readings only a few months ago, it's best to keep this in perspective.

Why is the U.S. in this situation? Because the economic recovery is so strong. The problem is that businesses can't make products fast enough to meet demand. The U.S. is seeing slower (though still-healthy) economic activity as supply chain bottlenecks limit activity and raise prices, despite a huge desire to get to a post-pandemic normalcy. Our U.S. GDP forecast of 5.7% for 2021 now looks too high. But, even with this slowdown, it still seems likely that 2021 growth will reach a 37-year high.

The other drag on growth, the delta variant, has eased further in recent weeks. The number of COVID-19 infections tied to the delta variant has fallen further from the September highs, now at July rates. Unfortunately, as fears of the delta variant ebb, the pace of vaccinations has stabilized at low levels.

Folks seem to be remaining cautious about going out, with most our mobility trackers either leveling off or hovering around slightly lower than July averages. Traffic in big cities remained stable in October, with the pickup in congestion since August.

However, in-room dining is now only 8.6% below precrisis levels after falling to -11.3% in the second half of September, and passenger air traffic picked up in October after September weakness. Retail sales were healthy in October as households were willing to pay for the few items left on the shelves.

Real-time pricing data continues to highlight higher inflation across most items with intermittent signs of an ebbing in prices. Gasoline prices remain at a seven-year high, which helped push both medium- and long-term inflation expectations higher through Oct. 27. Fortunately, some price indicators softened this month.

On the jobs front, it remains a workers' market. Indeed job openings reached another high in mid-October, and initial jobless claims fell to 281,000 in the week ended Oct. 23, the lowest since March 14, 2020. Amid a tight market, wages surged to 4.6% in September, according to the Bureau of Labor Statistics, as businesses scramble to add people to their rosters in order to meet massive demand.

New COVID-19 Cases Declined Further As Vaccination Rates Leveled Off

New COVID-19 cases and deaths keep retreating from the near-term highs in mid-September, with seven-day moving averages of daily new cases declining to 68,125 and daily new deaths falling to 4 per million people as of Oct. 26 (see chart 1). Vaccination rates seemed to have leveled off amid falling new cases, after a pickup at the start of the delta surge. The share of the population receiving at least one dose increased by 6 percentage points, to 66% as of Oct. 26, in the past three months, with daily doses administrated oscillating around 740,000 in the meantime. As the east and west coasts are protected from higher-than-national-average vaccination rates (mostly above 70% in terms of the share of population receiving at least one dose), new cases in the last seven days were concentrated in the southeast and west of the country (see charts 2-3).

Chart 1

Chart 2

Chart 3

Mobility Is Below Precrisis Levels Post The Delta Surge

As neither new COVID-19 cases nor deaths have fallen to levels comparable to those in early July, folks have remained cautious about going out, with most of our mobility trackers either leveling off or hovering around slightly lower than July averages. Google community trends remained around 5% below precrisis levels in late October, while seated dinners remained 7% below the 2019 baseline this month (see charts 4-5). Traffic in big cities stayed at similar levels this month, although the pickup in congestion levels since August may reflect the that more people are returning to work, instead of fewer worries about the virus (see chart 6).

Traveling enthusiasm ticked up in October, although it remained almost unchanged in the past three months. Hotel occupancy rates went up to 65% in mid-October, a notch lower than the 2019 average of 66%, while TSA checkpoint numbers moved up to 19% below the 2019 average in late October from 23% below a month ago (sees charts 7-8).

Consumer Spending Remained Stable Amid High Near-Term Inflation Expectations

Consumer spending remained steady in October, with the year-over-year growth rate of weekly Johnson Redbook same-store retail sales staying around 16% this month (see chart 9). Meanwhile, the consumer spending tracker by Opportunity Insights ticked up to 23% above pre-pandemic levels as of Oct. 17, increasing from 17.6% in mid-September. We suspect a good chunk of these gains, in current dollars, is due to higher prices, which consumers so far remain willing to pay. The accommodation and food industry, and arts, entertainment, and recreation industry both witnessed a slight rebound in consumer spending after a small dip in July and August, possibly reflecting the ups and downs of new cases as well as higher prices of late (see chart 10).

That said, heightened broad-based inflation may harm the credibility of nominal sales trackers when trying to determine real consumption growth. After all, most consumer sentiment readings have weakened, with the University of Michigan Consumer Sentiment Index falling to 71.2 in October, with both current and expected readings down. In contrast, the Conference Board Consumer Confidence Index ticked up for the month as healthy job market conditions supported household moods. The more real-time Ipsos-Forbes weekly Consumer Confidence Index dropped to 53.4 as of Oct. 22, indicating lower spending confidence than the first half of 2021 (see chart 11). The decline in consumer confidence is largely driven by longer-than-expected inflationary pressures, with long-term inflation expectations of the financial market increasing to their highest level since 2006.

Chart 4

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Chart 10

Chart 11

Mortgage Applications For Home Purchases Stabilized After Picking Up In September

Stimulated by replenishment of home inventories, both new home and existing home sales picked up in September. However, we saw mortgage applications for home purchases stabilize this month, with the Purchase Index from the Mortgage Bankers Association's weekly Mortgage Applications Survey ticking down by 2% from the same week last month (see chart 12). Lumber future prices, standing around $670/1,000 board ft. in late October, also stabilized after going up slightly in September, possibly reflecting the lingering supply constraints of labor and other construction materials (see chart 13). That said, housing activities, although still hot compared with precrisis levels, have retreated from the late 2020 highs.

Chart 12

Chart 13

Inflation Remains High, With Intermittent Signs Of Easing

Real-time pricing data continues to highlight higher inflation across most items, with intermittent signs of an ebbing in prices. Gasoline prices remain at a seven-year high, cutting into vacation plans to help push inflation expectations to new highs (see chart 14). Long-term inflation expectations, as measured by the 10-year forward rates, surged to their highest level since 2004. Meanwhile medium-term inflation expectations, as measured by the five -year forward rates, remained at their near-term high (see chart 15).

Fortunately, some price indicators softened this month. While lumber prices have moved off their mid-September low, they moderated in October and remain far below their May highs. The metal price index this week came off its Oct. 15 high, largely driven by production cuts in China. The metal index remains well above its 2019 average rate.

Global Supply Chain Constraints Were Relieved Slightly In October

Global supply chain pressures that have been constraining U.S. producers since early 2021 eased slightly, with both the globalized Baltic Dry Index and the metal price index coming down to 4,056 and $1,595 per point, respectively, from their near-term highs around mid-October (see charts 16-17). That said, the producer costs are still well above their 2019 averages, indicating salient supply chain bottlenecks.

Production indicators remained stable in October, as demand for vehicles and new homes are still elevated compared with pre-crisis levels amid a recovery in business and governments' investment appetite. Raw steel capacity utilization stayed around 85% this month, 5 percentage points above its 2019 average (see chart 18), while the Weekly Economic Index stayed around 7.6% at an annualized rate in the past four weeks (base effects may distort the index to some extent) (see chart 19).

Job Openings Stayed Above Pre-Pandemic Levels, Even For Industries Hit The Hardest By The Pandemic

Businesses have been eager to hire new employees in the past few months, with the Indeed job posting trends hitting 47% above the February 2020 baseline in mid-October (see chart 21). The persistently higher-than-pre-pandemic job posting numbers indicate both strong need for help from the businesses' side and sluggish responses from the job seekers' side. In the past month, job postings in industries hit the hardest by the pandemic--such as hospitality and tourism, sales, and food preparation and service--all saw stable numbers, despite the delta variant wave.

Job seekers are gradually settling down with new jobs, with both initial jobless claims and continuing claims declining to new lows since March 2020. Initial jobless claims decreased to 281,000 for the week ended Oct. 23, only 63,000 away from the 2019 average of 218,000 (see chart 22). Although pandemic-related federal unemployment benefits ended over a month ago, regular continuing claims fell to 2.16 million for the week ended Oct. 9, the lowest since the start of the pandemic but still higher than the 2019 average of 1.60 million (see chart 23).

Chart 14

Chart 15

Chart 16

Chart 17

Chart 18

Chart 19

Chart 20

Chart 21

Chart 22

Chart 23