With 6.5% Q2 growth, the US economy has surpassed pre-pandemic size

The solid 6.5% annual growth rate of the U.S. economy last quarter was fueled by government aid and vaccinations. This is yet another indication that the country has made a sustained recovery after the pandemic. The economy's total size has now exceeded its pre-pandemic peak.

With 6.5% Q2 growth, the US economy has surpassed pre-pandemic size

The solid 6.5% annual growth rate of the U.S. economy last quarter was fueled by government aid and vaccinations. This is yet another indication that the country has made a sustained recovery after the pandemic. The economy's total size has now exceeded its pre-pandemic peak.

TheEditor
TheEditor
29 July 2021 Thursday 12:23
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With 6.5% Q2 growth, the US economy has surpassed pre-pandemic size

Thursday's Commerce Department report estimated that the nation’s gross domestic product, which is the total output of goods and service production, grew at a faster pace in the April-June period than the 6.3% annual rate of growth in the first quarter.

Analysts had predicted a lower quarterly number. But that was mainly because supply chain bottlenecks exerted a stronger-than-predicted drag on companies' efforts to restock their shelves. In fact, the slowdown in inventory building actually slowed down 1.1 percentage points of last quarter's annual increase.

Consumer spending, the main engine of the U.S. economic engine, was strong last quarter. It grew at an 11.8% annual pace. Although the rate of growth in goods spending was 11.6%, it was down from the 27.4% increase seen in quarter one. Spending on services, including restaurant meals and airline tickets, increased at a 12% pace, up from 3.9% in the January-March period. This is because more Americans are now willing to travel, shop, and eat out.

The economy will grow by 7% in 2021. This would mark the strongest year-to-year growth since 1984. It would also mark a sharp reverse from the 3.4% economic contraction last year -- the worst in 74-years -- due to the pandemic.

Despite the slower than expected second quarter growth, Lydia Boussour (lead U.S. economist at Oxford Economics) still sees solid gains ahead with around 7% growth for all of 2021.

Boussour stated that "we expect the economy will carry strong momentum into 2022 with strong growth underpinned by strong corporate and consumer fundamentals."

The possibility of a resurgent coronavirus, the highly contagious Delta variant, is a concern that overshadows the optimistic economic forecasts. Now, the U.S. has more than 60,000 new confirmed cases per day, compared to 12,000 a month earlier. A surge in viral infections could cause consumers to pull back and slow down their spending.

The economy continues to show strength for the moment. The average number of jobs added by American employers in the last month was 850,000, which is well above the average for the three previous months. The average hourly wage rose by 3.6% in comparison to a year ago, which is faster than the annual rate before the pandemic.

Gus Faucher (chief economist at PNC Financial), stated that the fundamentals of consumers and businesses were still very strong. He said he has not seen any effects from an increase in viral cases confirmed to date.

Consumer confidence is at its highest since March 2020's pandemic. This is a key reason why retail sales are stable as Americans shift spending to services, from airline travel and restaurant meals to entertainment and shopping sprees. Orders for manufactured goods are a sign of solid corporate investment.

The federal rescue money has contributed trillions to the recovery. This includes everything from stimulus checks to expanded unemployment benefits, small business aid, and just-distributed child credit payments. Millions of wealthy households have seen a huge increase in their wealth due to stock market and home equity gains.

Federal Reserve is providing substantial support to the economy. The Fed reiterated Wednesday that it will keep its key short term interest rate at an all-time low of near zero in order to maintain low borrowing costs. To encourage borrowing and spending, the Fed will continue to purchase government-backed bonds.

In fact, the recovery has been so quick, with consumers' pent-up demand driving growth after a year in lockdowns. The only risk is an inflation spike that could become out of control. The sharpest price rise in 13 years, and the fourth consecutive month of large price increases, was recorded in June as consumer prices rose 5.4% compared to a year earlier.

Core inflation excludes food and energy, so the measure of consumer inflation in second-quarter GDP reported a 3.4% annual increase. This was the largest such jump since 1991.

Last quarter saw a 9.8% annual decline in housing construction. This was in addition to the negative impact on GDP caused by weak inventory restocking. This was partly due to the difficulties home builders had in obtaining lumber or other supplies.

Economists warn that if the Fed does not withdraw its extraordinary support of the economy, it may respond too late and too aggressively against high inflation by rapidly raising rates and possibly causing another recession.

Jerome Powell, Fed Chair, stated Wednesday that inflation readings recently reflect price increases in a small range of categories such as used cars and airline tickets. He also said that temporary supply shortages caused by the rapid reopening of the economy have distorted recent inflation readings. These shortages include items such as furniture, clothes, and computer chips.

The rise in viral cases in Asia's transportation ports has caused some manufacturing plants in Asia to close down, further magnifying the supply bottlenecks. These bottlenecks could then continue to block the flow of goods to American retailers.

Restaurants, retailers, and other service-industry employers have had to work harder to fill the jobs of consumers who are increasing in demand. Even employers that have raised wages, this has also made it difficult for them. Despite steady job market gains, 5.9% unemployment is still far higher than the 3.5% rate before the pandemic. The economy still has 6.8 million fewer jobs than it did before the pandemic.

The economy will likely lose its current rapid pace of growth if it is subject to future shortages.

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