CAN THE ECONOMY’S COMEBACK LAST?
The U.S. economy grew sharply in the second quarter amid the reopening economy and increasing COVID-19 vaccinations, but the surge was less robust than expected and likely represented a high-water mark in a historically strong year.
The nation’s gross domestic product, the value of all goods and services produced in the U.S., increased at a seasonally adjusted annual rate of 6.5% in the April-June period, the Commerce Department said Thursday. Economists surveyed by Bloomberg had forecast an 8.5% rise in GDP.
During the quarter, economic output topped its pre-pandemic level, a notable milestone in light of the severity of the nation’s steepest recession.
For the second straight quarter, the gains were led by households flush with about $2.5 trillion in stimulus checks and wages they socked away while hunkering down during the pandemic. Businesses also played a big role as they scrambled to meet the customer demand by purchasing new computers, trucks and factory machines.
But those forces were partly offset by a slowdown in housing starts largely because of shortages of materials and workers, as well supply chain bottlenecks that forced companies to draw down inventories.
Growth is expected to remain relatively strong the rest of the year as more Americans receive COVID-19 shots and shoppers continue to splurge. About 58% of people older than 12 have been fully vaccinated.
But activity is expected to slow more than previously anticipated in coming months amid lingering supply snags that are leaving store shelves low on many popular products, a jump in inflation, the rapid spread of the COVID-19 delta variant, and the fading impact of the federal stimulus measures.
Worker shortages also have constrained the economy but are likely to ease by September as schools reopen and parents return to offices, and generous unemployment benefits expire.
The variant poses a further risk to the economy if it prompts states and cities to reinstate business constraints. The strain has caused the seven-day moving average of COVID-19 cases to climb to about 40,000 recently, up from about 11,000 in mid-June, though that’s still far below the 250,000 cases a day recorded in January, according to the Centers for Disease Control and Prevention.
“The peak may be behind us, but we expect the economy to carry strong momentum into 2022.” Lydia Boussour Oxford Economics
Even with the hurdles, economists surveyed by Wolters Kluwer Blue Chip Financial Indicators predicted this month that the economy would grow 6.6% this year, the fastest pace since the early 1980s, according to their average estimate. Top economic research firms such as Barclays, Morgan Stanley, Bank of America and Oxford Economics foresaw growth of about 7%.
“The peak may be behind us, but we expect the economy to carry strong momentum into 2022,” economist Lydia Boussour of Oxford Economics wrote in a note to clients.
A closer look at how the economy performed last quarter:
Consumer spending booms
Household spending surged 11.8% following an 11.4% rise early in the year. Americans are still unleashing a well of pent-up demand now that most states have lifted capacity and other business restrictions. Some counties in California and Nevada, however, are advising all residents, including those vaccinated, to wear masks indoors again after the recent COVID-19 spikes.
Since December, the spending binges have been aided by stimulus checks of $600 and $1,400 for most individuals.
Consumption makes up about 70% of economic activity.
Business investment shines again
Business capital spending grew sharply for a fourth straight quarter, climbing 8% after double-digit increases in the previous periods.
Outlays for computers, delivery trucks, factory machines and other accessories rose 13%. Spending on buildings, oil rigs and other structures fell 7%.
Many firms are buying equipment to serve growing consumer demand for services as the economy reopens. They also have continued to purchase technology for employees to work remotely. And manufacturers have expanded their operations as consumers have snapped up electronics and other goods for the home.
Companies draw down stockpiles
Businesses pulled from inventories to meet growing demand amid the supply-chain snarls, reducing growth by more than a percentage point. The drawdowns have been a drag on the economy for two straight quarters.
Residential investment tumbles
Housing construction and renovation fell 9.8% after booming the three previous quarters. Although demand is strong, the supply chain problems have slowed deliveries of materials and pushed up prices and the industry is beset by worker shortages.
During the pandemic, Americans moved to bigger houses in less crowded suburban areas, a trend that has continued even as some move people are moving back to cities as the health crisis eases.
Trade hurts growth
U.S. exports grew 6% as economies overseas reopened but that was outpaced by a 7.8% gain in imports as Americans returned to stores. The result: a wider trade gap that trimmed growth by nearly half a percentage point.
Government spending declines
Government spending fell 1.5% after rising 4.2% in the first quarter. While state and local spending grew, federal outlays fell 5%, including a 10.4% pullback in nondefense purchases. The drop likely was related to the wind-down of the forgivable loan program for small businesses, Capital Economics says.