US economy just posted the largest jump in growth since 2020

US economy just posted the largest jump in growth since 2020

Posted: Jul 29, 2021 11:11 AM
Updated: Jul 29, 2021 11:11 AM

The US economy in the second quarter expanded at a slower rate than expected but still at its fastest pace since last fall, growing at a seasonally adjusted, annualized rate of 6.5%.

In terms of real gross domestic product — the broadest measure of economic activity — the economy has now recovered in that has grown bigger than its pre-pandemic size.

Earlier this month, the National Bureau of Economic Research designated the pandemic recession as the shortest on record, lasting just two months: March and April 2020.

In normal times, a 6.5% growth rate would be a reason to celebrate, and it's still a pretty good performance during this recovery. Yet it's a disappointment compared with the 8.5% growth rate economists had forecast.

It was also only little changed from the first quarter when the economy grew at an annual rate of 6.3%.

Nevertheless, it was the biggest jump in growth since the nation roared back in the third quarter of 2020 from the lockdown-driven recession.

More spending, more inflation

The acceleration in the recovery was spurred consumer spending, not least spurred by the last round of stimulus checks, as well as the reopening of the economy and continued vaccination effort that allowed Americans to take part in public life safely again. Consumer spent more on services, particularly on dining out and traveling.

Driven by the same dynamics, measures of inflation included in the GDP report rose throughout the spring.

For example, the price index that tracks personal consumption expenditures rose to 6.4% in the second quarter, its highest level since 1982. Stripping out more volatile items like food and energy the price index stood at 6.1%, the highest reading since 1983.

Price increases are rampant. But the Federal Reserve continued to call the inflation spike temporary during Wednesday's monetary policy update, with Chairman Jerome Powell saying extreme price hikes were confined to just a few sectors that were particularly affected by the pandemic.

But the GDP report also pointed at the underlying factors driving prices up: "Supply constraints and labour shortages mounted, suggesting a downward revision to our outlook," said Sal Guatieri, senior economist at BMO. Inventory and residential investment, as well as government spending decreased in the second quarter.

While consumer spending was strong enough to offset the drags on the recovery, "it's clear the latter headwinds are slowing the economy's momentum," Guatieri said.

This should be soothing for anyone worried the economy might overheat amid unprecedented fiscal and monetary policy support, noted RSM chief economist Joseph Brusuelas.

Delta worries

Economists are starting to lower their GDP forecasts for the year in the face of the lower-than-expected growth rate in the second quarter and the rising Covid infections thanks to the Delta variant.

Goldman Sachs slashed its outlook earlier this week, saying consumer spending is still too sluggish.

On Thursday, Capital Economics cited "waning" fiscal stimulus, price increases, the Delta spread and other factors for cutting its GDP growth expectations to an annualized 3.5% annualized in the second half of the year, according to comments from US chief economist Paul Ashworth.

The spread of the Delta variant prompted a revision of mask recommendations from the Centers for Disease Control and Prevention earlier this week.

The variant should be taken seriously, but it likely won't lead to the kind of strict lockdown the nation endured at the start of the pandemic, according to economists and Fed Chairman Powell. Renewed health risks could, however, put a damper on consumer spending as people pull back from eating out and traveling again.

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