The economy is weakening.

Last week’s GDP report confirmed that when the Bureau of Economic Analysis announced that the economy grew just 2% in the third quarter. That’s down from 6.7% in the previous quarter.

While many analysts were surprised, they knew that the previous quarter’s pace was unsustainable. The economy grew about 2% a year before the pandemic, and we’re heading back to that pace now.

Several headlines noted a sharp slowdown in consumer spending.

But a deep dive into the data shows there are still trillions in pent-up demand that will allow the economy to grow.

The GDP report measures consumer spending by personal consumption expenditures (PCE). The chart below shows this data over the past few years.

Pandemic Hit Consumer Spending

PCE Hasn’t Recovered From the Pandemic

Before the pandemic, PCE showed steady growth of about $650 billion a year. Of course, spending plunged during the pandemic.

From March 2020 through February 2021, the year-over-year change in PCE was negative as consumers stayed home.

During that time, PCE fell by $5.9 trillion. As vaccines became available and the country started on the path to normalcy, PCE surged. Since March 2021, PCE has exploded. Consumers spent over $14 trillion.

But the economy is still below trend. If PCE expanded at its pre-pandemic trend, consumers would have spent about $3.5 trillion more than they did. That indicates there is pent-up consumer demand.

The shortfall in spending coincided with an increase in savings. Many consumers have more cash than usual in their checking and savings accounts. They may be waiting to splurge on vacations or extravagant evenings out. Others may be waiting for a return to the office to go clothes shopping.

No matter how that money is spent, several trillions of dollars will pour into the economy over the next year. That will boost GDP, corporate earnings and the stock market.

Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.

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