New government figures show that the U.S. economy has expanded at a far slower pace in the second quarter than economists had predicted, though real gross domestic product (GDP) surpassed its pre-pandemic high, cementing the V-shaped recovery.
GDP rose at a 6.5 percent annualized rate last quarter, the Commerce Department said in a July 29 statement. The number is an “advance” estimate and will be revised in a future update. The Department revised its first-quarter GDP growth estimate down to 6.3 percent from 6.4 percent.
Robust consumer spending and business investment drove economic output higher in the second quarter, while a rise in imports and a sharp decrease in private inventory investment—led by a drop in retail trade inventories—were a drag on output, the Commerce Department stated.
Economists polled by Reuters had forecasted GDP rising at an 8.5 percent rate last quarter, while a Dow Jones estimate predicted economic growth of 8.4 percent, making the Commerce Department’s figures an underachieving surprise.
Calling second-quarter growth “disappointing,” ING Chief International Economist James Knightley said in a statement that the GDP number “means that the US economy has now recovered all of the lost pandemic output and marks another key milestone in the recovery.”
“The next target, given all the stimulus sloshing around, is to end the year with an economy larger in size than would have been the case had the pandemic not struck.”
While all three of the main Wall Street indexes climbed on the opening bell on July 29, the dollar index (DXY) responded with a downward slide.
While the second quarter likely marks the peak in growth this cycle, economists widely expect the economic expansion to remain solid for the remainder of the year. One of the risks to the economic outlook is a resurgence in COVID-19 infections, driven by the Delta variant, fueling fears of renewed lockdowns.
Higher inflation, if sustained, as well as ongoing supply chain disruptions, could also prove to be a drag on growth going forward.
The Commerce Department’s GDP announcement included a note about inflation. The personal consumption expenditures (PCE) price index shot up by an annualized 6.4 percent in the second quarter relative to the first quarter. The so-called core PCE price index, which excludes the volatile categories of food and energy, increased by an annualized rate of 6.1 percent quarter-over-quarter.
The PCE price gauge is the Federal Reserve’s preferred inflation measure for calibrating monetary policy. The Fed’s target is around 2 percent, more than three times lower than the figure released by the Commerce Department.
On July 30, the Commerce Department is scheduled to release the monthly PCE, which will show the extent of upward price pressure in June. The agency’s most recent release showed that the pace of inflation, as measured by the PCE gauge, hit a 13-year high of 3.9 percent in the 12 months that ended in May, nearly double the Fed’s target.
While some economists have raised the alarm on inflation, Fed officials and members of the Biden administration have insisted that price rises are temporary, arguing that inflationary pressures will ease as pandemic-related supply chain disruptions are ironed out.
Fed Chairman Jerome Powell told reporters on July 28 that, while it’s possible inflation “could turn out to be higher and more persistent than we expected,” he believes prices are likely to recede once supply chain bottlenecks abate.
Powell reiterated his view that, in the next year or so, inflation will return closer to the central bank’s target of 2 percent.
The Fed kept its overnight benchmark interest rate near zero on July 28 and left its massive asset purchase program unchanged.
Consensus estimates among economists are that the U.S. economy will grow by around 7 percent this year, which would be the strongest performance since 1984.