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On the Fourth of July, the U.S. economy looked ready to skyrocket.

"We're seeing record job creation and record economic growth," President Joe Biden said then as he encouraged Americans to celebrate their newfound independence from the coronavirus pandemic.

By Labor Day, however, the economy looked more like a dud, its midsummer sparkle smothered by a wave of delta variant infections and persistent supply chain problems.

The nation's gross domestic product grew at an annual rate of just 2 percent in the third quarter, 

 — a sharp slowdown from the 6.7 percent pace in the spring quarter. 

But there's room for hope: The health outlook is improving, and forecasters believe it could set up the economy for stronger growth in the last three months of the year.

"We've lost a step here, but I think we're going to get a lot of steps back pretty quickly," says Mark Zandi, chief economist at Moody's Analytics. "This highlights how tethered the economy is to the pandemic. It's still driving the economic train."

The pandemic has had an unprecedented impact across the economy, and few periods have illustrated its ups and downs as dramatically as the slowdown in late summer and early fall.

Heading into July, the economic train was chugging along at a healthy clip, and that rapid GDP growth was expected to continue.

"It looked like the recovery could only get stronger," recalls Ben Herzon, an economist with the forecasting firm IHS Markit. "Coronavirus case counts were low and declining. People were making plans to go back to work."

Restaurants and airlines that were pummeled by the pandemic in 2020 hoped to cash in, as Americans dined out and booked overdue vacations.

more than a million jobs in July, including 57,000 in manufacturing.

"Everybody was looking at this pent-up demand coming in and chasing business," says John Gessert, who runs a toy manufacturing company in Walled Lake, Mich.

There's no mystery about why a soaring economy suddenly slumped.

"What happened was, delta happened," Federal Reserve Chair Jerome Powell told reporters last month.

As infections, hospitalizations and deaths tied to the coronavirus variant mounted in late July and August, people spent less money on in-person services and many shelved plans to go back to work.

"Delta did a lot of damage," says Zandi. "It made consumers more cautious, so travel fell off. People went to restaurants less often. It rescrambled the global supply chains."

In tourist-dependent Las Vegas, visitor traffic dropped 9.2 percent between July and August and another 2.1 percent in September.

"It definitely would have been a lot more people here if it wasn't for the delta variant," says Precious Briggs, an unemployed server who's waiting to be called back to work at the Palace Station casino.

While some businesses were hurting for customers, others struggled to find workers. Millions of potential employees were either out sick with COVID-19, staying home for fear of catching it or busy caring for loved ones who were sick.

"The challenge for us has been getting enough drivers," says Angela Eicher of the Nitetrain Coach Company, which provides bus transportation for touring musicians. "We have had a couple of drivers contract COVID while they were out on the road. We've had a couple contract COVID while they were at home."

Gessert's toy company, which typically employs about 300 people in Michigan and Mississippi, has been limping along with 230.

"We've had to limit molding hours because we don't have enough people to put the parts together," Gessert says.

The lack of workers has contributed to — and been compounded by — a shortage of materials.

The plastic resin that Gessert's company uses to make toys has doubled in price, and even cardboard packaging has sometimes been hard to come by.

"What used to take a week now takes two to three weeks," Gessert says. "That's the frustrating thing. We could have done a lot more business had plastic not gotten so expensive and had we been able to hire people."

The Tackle Box 2 restaurant and boat ramp on Ohio's Sandusky River had plenty of traffic during the summer. But keeping customers fed was a challenge.

"Onion rings. Cheese sticks. There's stuff I just can't get," says Sereta Stephens, whose father started the restaurant 30 years ago. "If I order it today, it might be here next week or it might be in two weeks."

Consumer spending held up reasonably well during the quarter, thanks in part to federal aid payments that padded savings earlier in the year. But consumers might have bought even more stuff had it not been for delivery delays and shortages.

"It's great to say that people have money to spend. But unless they have things to spend it on, it doesn't really translate back to the economy," says chief economist Nela Richardson of the payroll processing company ADP.

The Commerce Department said a slowdown in consumer spending more than accounts for the decline in GDP growth during the quarter.

While third-quarter growth is disappointing, forecasters expect GDP growth to pick up in the final months of the year.

 nearly 60 percent since early September. And as the health outlook improves, restaurant dining, air travel and in-person entertainment have already started to rebound.

Winter is typically a slow season for touring musicians, but Nitetrain's bus schedule is booked solid for November.

"People are eager to go out and see some live music," Eicher says. "Also, I think the musicians are ready to be out playing live music again in front of crowds."

Herzon thinks the economy will grow at an annual rate of nearly 5 percent during the last three months of the year — slower than in the spring but much stronger than during the late-summer bust.

"Consumers are spending, and that's a good sign," Herzon says. "As long as businesses can learn to manage their supply issues, then growth can pick up."

The strength of the recovery will also depend on how quickly would-be workers — some of whom were sidelined by the delta wave — decide it's safe to reenter the workforce.

"I think the biggest question out there right now is, where are all these missing workers?" asks Richardson. "How long will they stay missing, and what will entice them to come back to the labor market?"

She expects stronger job gains this winter than in August or September but doubts employers will add a million jobs a month, as they did in July.

"We'll likely see progress, but it will be continued choppy progress. And it will be dependent on the containment of the virus," Richardson says. "People's confidence in the economy right now is tied to health conditions." 

Business and Economic News

Health

COVID-19

Scott Horsley

Author

The U.S. economy slowed sharply in the third quarter as the delta variant and persistent supply chain woes weighed on growth. The months ahead should be better.

How the economy went from sizzle to fizzle, and why there's hope for a way back

Go Deeper.

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