Pace of US economic growth is slowing, but that's good news

Official data on the third quarter of this year will not be released for a few more weeks, but I feel pretty confident saying the pace of expansion in the U.S. economy has decelerated significantly in recent months.

This deceleration was not unexpected, and it is not an indication that a recession is imminent. In fact, I can make a strong argument that a deceleration in growth at this time is actually good for the long-term prospects for the economy. It is a healthy response as we steadily emerge from the pandemic-induced economic shock we sustained in 2020.

Nevertheless, a change of this magnitude merits a closer look. As always, we need to monitor the economic environment on a consistent basis, recalculate our risks using the freshest data and adjust our strategies accordingly.

As the chart indicates, real gross domestic product in the U.S. expanded at a rate well above its historical average in the first half of 2021. Adjusting for inflation, GDP grew in excess of 6 percent in both the first and second quarters. The long-term average growth rate in real GDP in the U.S. is about 3 percent per year, and the average was only 2 percent per year for the 10 years after the Great Recession ended in 2009.

But in the third quarter, the economy encountered some headwinds. Specifically, the fiscal stimulus provided to the unemployed started to roll off, the negative impact of the delta variant of COVID gained momentum and the supply chain shortages in many industries became more acute. Fortunately, none of these issues appeared out of the blue. We had warning, and most of us have been actively engaged in finding either permanent solutions or temporary workarounds.

As we head into the fourth quarter and 2022, I believe the constraints arising from both the decrease in fiscal stimulus and the problems with the delta variant will be short-lived. As it pertains to decreased stimulus, there is plenty of liquidity in the economy. There may even be too much, and I worry this will cause a sharp rise in the rate of inflation. This risk of future inflation is one of the biggest risks to the forecast for next year and beyond. But inflation risk notwithstanding, the decrease in household incomes resulting from smaller unemployment checks will be offset and exceeded by the gains that come from increased wages.

COVID-19 will remain a risk for many members of our society for the foreseeable future. It is not going to disappear completely. But the impact of this risk on the overall economy will continue to diminish quickly. It is not a factor in my forecast for 2022.

In addition to these macro restraints that developed in recent months, the plastics industry has been hit harder than many other industries by the sharp increases in the prices for crude oil and natural gas, which have resulted in a substantial rise in the price of resins this year. There is more than one cause for this situation, but one factor has been the weather.

We typically do not get much warning for most big weather-related problems, but we have dealt with big weather problems in the past and we most certainly will have to deal with them again in the future. By now we should all know that this is a supply chain risk, and it must be weighted more heavily in the future strategies of the government and our industry. This is not a one-time event.

Weather is not the only supply chain risk we must address, and it is not even the biggest. Along with my concerns about inflation, the supply chain problems cause me the most worry. These are the things that keep me up at night. Given enough time, our economy is dynamic and creative enough to innovate our way out of these problems. But they are still a risk, and I cannot ignore them.

When I put all of this together, the question becomes, "How do we get to, and then sustain, a Goldilocks economy — not too hot and not too cold?" Here is what I think in these early days of autumn:

The U.S. economy needed a period of robust growth to pull us out of a severe recession, but economic history teaches us that too much rapid growth will eventually create stresses. It is not always possible to specify what these stresses will be and when they will occur, but they will undoubtedly develop.

Fortunately, history also teaches us that sustained periods of moderate economic growth are good for relieving economic stress. And while I may not always be comfortable with the laws of economics, I have found it unwise to argue with them. That's why I think it will likely be beneficial in the long run for the pace of economic growth to moderate in the coming quarters.

In my opinion, the optimal pace of growth in real U.S. GDP in the coming quarters, the pace that can be sustained without creating a lot of stresses or inflation or bubbles and the pace that is best for the health of the plastics industry, is 3-3.5 percent.

This is higher than the long-term average for the U.S. economy, but there is still a substantial slack in some segments of service sector, so we can run a bit higher than average until these segments fully recover. This will likely take another year or so. Once that happens, the optimal pace of economic growth will be 2.5-3 percent per year.

That is my current forecast, but it could change. Like most of you, I have acquired a greater appreciation for uncertainty over the past year and a half. I am a bit less confident in my forecasts, and I will even admit to a vulnerability to bias and aspiration. But I am also more vigilant, and I have learned much. Therefore, I will update my forecasts more frequently and more meticulously, and I encourage others to do likewise.