GDP roars past pre-COVID levels — where does the economy go from here?
WASHINGTON — Even with production glitches, transportation bottlenecks and labor shortages, the U.S. economy grew in the second quarter at one of the fastest rates in decades, lifting the nation’s total output above where it was before COVID-19 hit, according to government data released Thursday.
“That we were able to recover so quickly is astounding,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings.
The question now is whether the extraordinary growth surge reflects the basic strength of the economy, or stems from other factors that could fade away.
The extra federal aid for the unemployed in many states does not expire until Sept. 6. Previous government relief efforts approved during the height of the early pandemic shutdown are still helping the economy. And even if Congress whittles down President Joe Biden’s massive infrastructure plan, many analysts expect a significant new burst of federal spending to be approved.
Bovino credited what she calls “revenge spending” for the rapid growth.
“Everybody was locked up for so many months, they’re going to go out, they’re going to party — and I can’t blame them,” she said. “Right now, it’s Vday for the United States.”
The Commerce Department said that the nation’s gross domestic product, the broadest measure of economic output, expanded at an annual rate of 6.5% in the last quarter. Analysts were expecting a pace of about 8%, but a sharp drop in housing investment and higher inflation curtailed real growth.
Still, apart from the initial snapback after the pandemic-induced plunge last year, the latest GDP increase was an increase from the first quarter’s 6.3% annual rate and marked the strongest growth of any quarter since 2003.
Rising prices and especially the new coronavirus delta variant present threats to the recovery. But so far there’s been little effect on consumer spending, which accounts for about two-thirds of U.S. economic activity.
Traffic at restaurants, airports and entertainment venues has held up well. And hotel occupancy is now above pre-pandemic levels as people make up for lost time visiting families and others move to new locales.
In the second quarter, spending on services jumped 12% from the preceding three months, slightly more than for goods purchases. Many consumers still have a reservoir of COVID-19-inspired savings to satisfy their pent-up demand, while businesses and states and local governments got large infusions of federal assistance in the spring.
“The scale of the government stimulus, both federal and state, is so huge that money can’t be spent fast enough, representing substantial future spending,” said Sung Won Sohn, professor of finance at Loyola Marymount University in Los Angeles.
The new GDP report shows business spending also made solid gains in the last quarter. And strong corporate profits have buoyed stock markets, even as they have been more wobbly in recent days.
Despite the caveats and uncertainties, most economists expect the economy to keep expanding at a rapid pace in the near term, with many forecasting GDP growth for all of 2021 at 6% to 7%, which would be the strongest since 1984.
At the same time, both analysts and policymakers are paying especially careful attention to the delta variant because it may be uniquely capable of drastically altering their projections.
States with low vaccination rates that have seen a surge of infections and hospitalizations lately, like Missouri and Louisiana, make up a relatively small part of the American economy and hence are not likely to be a big drag on national output.
Florida, though, is an exception. Not only large, it has been one of the hardest hit by the variant and is showing some signs of weakening economic activity, according to various indicators compiled by Moody’s Analytics.
Additionally, one of the ways that the variant could crimp the broader economy is by exacerbating production problems and the availability of goods for purchase-hungry consumers.
Increased infection rates and more hospitalization could intensify labor shortages. A worsening pandemic could also cause more people to stay at home and more schools to remain online.
Already, shortages of workers and supplies of critical products like semiconductors have slowed economic activity, particularly in the car industry.