A worker lifts a fly chain at the Calder Brothers plant in Taylors, South Carolina, USA, July 19, 2021.
Brandon Granger | Calder Brothers Corporation | Reuters
The US economy is now larger than it was before the pandemic, but the growth rate may have peaked this year at a much slower pace than expected.
That does not mean that the second half of the year will not be strong or that the recovery will derail. The question is how strong growth can be, with a number of factors that could influence it, including the delta variant of the coronavirus.
Gross domestic product accelerated 6.5% year-on-year in the second quarter, slightly ahead of the revised 6.3% increase in the first quarter. But it was well below the 8.4% economists had expected, and far short of their earlier predictions that growth would be 10% or higher in the peak quarter of this year.
GDP is the measure of all goods and services produced from April to June. According to the Department of Commerce, quarter-on-quarter GDP levels rose to $19.4 trillion in the second quarter, up from $19.2 trillion in the fourth quarter of 2019.
“We noted that the GDP growth rate in the second quarter is a good measure of the ‘speed cap’ for the economy, given the widespread supply chain disruptions. That rate cap is slightly lower than we thought, and a lot lower than the most forecasters and government agencies expected,” wrote Mike Englund, chief economist at Action Economics. “If the deficits continue, there is a good chance that the more optimistic forecasts in the market will have to be lowered for the third quarter as well.”
Englund said he will adjust his forecast for the second half, but now sees 2021 GDP growing 6.1% year-on-year and 6.2% in the fourth quarter compared to the fourth quarter. He said the Fed’s central trend forecast is much higher, at 6.8% to 7.3%.
The pace of growth in the second quarter was the fastest since the third quarter of last year, when the economy recovered 33.4% after the stunning collapse in the second quarter. Other than that, it was the best growth since 2003.
Economists were surprised by some elements of the second quarter report. Inventories remained a drag as many anticipated companies would begin rebuilding them. Government spending was also negative, as were some construction categories.
“Everything that was expected to be weak came in a little weaker. There were more weak surprises than strong surprises,” said Tom Simons, money market economist at Jefferies. “Right now we’re really in no man’s land with the current economic data coming in. It continues to come in softer than expected, but not at downright soft levels. I think we’ll stick with incoming data to find out what’s happening.” in Q3.”
The consumer was the bright spot, consumption exceeded expectations. Consumption rose by 11.8% in the first quarter, with a 12% growth in the services sector. Consumers account for about 70% of all activities.
Several factors holding back growth
Simons said the drag on dwindling stimulus is already showing in the second quarter, after the massive burst in government spending. For example, government spending on non-defense fell by 10.4%, after an increase of 40.8% in the first quarter.
“You also had negative net exports and a pretty big drop in inventories. All of that made for a pretty soft lead,” he said.
Simons said economic activity is expected to pick up in September when schools reopen and workers are expected to return to their offices.
“I wouldn’t write off the rest of the year…I think there’s still reason to be optimistic about the rest of this year and 2022,” he said, adding that he expects a thrill from rebuilding the inventory.
Inflation was part of the drag in the second quarter. Measured by main personal consumption expenditure, inflation rose by 6.1%, the highest rate since 1983.
“We don’t expect inflation to continue rising at that rate. One reason we still expect solid growth this year is because we won’t see high inflation,” said Luke Tilley, chief economist at Wilmington Trust.
Concerns are rising about the virus
But the Covid resurgence looms large over the outlook.
Tilley said if the delta variant becomes a factor in slowing growth this year, economic activity will expand into next year. But if the economy slows because consumers have spent their savings or changed their spending habits on services, that would lead to a more negative outlook for the economy.
He pointed out that how companies respond to the pandemic will determine spending. For example, expenditure on constructions decreased, but intellectual property and equipment were higher.
“I’m more concerned that we’re moving into a world where, yes, technology allows us to keep spending no matter what happens with Covid. That keeps the overall economy going, but it also means you can permanently close some jobs faster. can eliminate,” said Diane Swonk, chief economist at Grant Thornton.
Swonk said a larger Covid outbreak could lead to consumer behavior that could impact spending and slow growth.
“I would expect people to be able to procrastinate and procrastinate, which will prolong the recovery,” she said. “Disruptions that were once outliers and now normal.”