Economic growth slows in third quarter as Biden unveils “Build Back Better” framework

Market update

The American economy suffered its worst quarter since Q2 of 2020, as government stimulus continues to shrink and inflation continues to rise. U.S. gross domestic product slowed to 2% growth (annualized) in the third quarter, falling from 6.7% in the second quarter and coming in below market expectations of 2.7%. Driving the drop in GDP was a downturn in personal consumption, as it grew by 1.6% in Q3 after reaching 12% in Q2.

After months of negotiation, President Biden unveiled the “Build Back Better” plan framework, a $1.75 trillion package that aims to tackle climate change, expand Medicare coverage, broaden access to pre-school for 3- and 4-year-olds, and extend the child tax credit. Items left off the updated framework that were originally included are free community college and paid family leave.

The U.S. consumer confidence index jumped to 113.8 for the month of October, beating a forecast of 108. The index rose for the first time since hitting 128.9 in June, as rising prices due to supply chain limitations had dimmed consumer confidence over the previous few months.

On Friday, personal consumption expenditures (PCE) data for the month of September were released, rising 0.6% and meeting market expectations. The increase reflected a jump in spending for services, including healthcare and food services. On the other hand, spending on motor vehicles and parts saw a sharp decline. As a result of all the data, short-term rates spiked throughout the week, while 5- to 30-year rates saw a considerable drop.

Labor market update

Initial jobless claims for the week ending October 23 fell to a new pandemic-low of 281,000, coming in below market expectations of 289,000. This marked the fifth straight week of declining initial jobless claims as unemployment benefits have subsided. The four-week average for initial jobless claims also fell below 300,000 for the first time since the start of the COVID-19 pandemic. To round out the positive news in the labor market from last week, continuing jobless claims fell to 2.243 million compared to the 2.240 million expected.

Commodities update

Crude oil experienced a volatile week after prices climbed early due to forecasts predicting higher oil prices to close 2021. However, reports showed that crude oil inventories rose by 4.3 million barrels for the week ending October 22, coming in higher than expectations of a 1.9-million-barrel gain. An increase in net imports of crude oil contributed to the rise in inventories. As a result, prices fell and WTI crude finished the week at $83.22/bbl. Aluminum prices also fell last week after China announced a price cap on coal to ease the energy crisis currently occurring. LME Aluminum ended the week at $2,695/MT. Despite the falling prices over the last week, rising commodity prices have caused many companies to explore hedging in the recent months.

Looking ahead

Another heavy week of economic data lies ahead, highlighted by an FOMC meeting on Tuesday and Wednesday. Investors will certainly listen for the Fed’s take on rising inflation and the recent GDP data. October nonfarm payrolls and unemployment rates will also be released on Friday.