The U.S. economy is bigger than it was pre-pandemic, but Covid could still decide what happens next

A worker hoists a flight chain at the Calder Brothers’ facility in Taylors, South Carolina, U.S., July 19, 2021.

Brandon Granger | Calder Brothers Corporation | Reuters

The U.S. economy is now larger than it was before the pandemic, but its growth rate may have peaked this year at a much slower pace than expected.

That doesn’t mean the second half of the year won’t be strong or the recovery will be derailed. The question is how strong growth can be, with a number of factors that can impact it, including the delta variant of the coronavirus.

Gross domestic product accelerated at a 6.5% annualized rate in the second quarter, slightly better than the revised 6.3% gain in the first quarter. But it was well below the 8.4% expected by economists, and far less than their earlier forecasts that growth in this year’s peak quarter would be 10% or higher.

GDP is the measure of all goods and services produced in the April to June period. According to the Commerce Department, the quarterly GDP level rose to $19.4 trillion in the second quarter, higher than the $19.2 trillion in the fourth quarter of 2019.

“We’ve noted that the Q2 GDP growth pace is a good gauge of the ‘speed limit’ for the economy, given widespread supply chain disruptions. That speed limit is a bit lower than we thought, and quite a bit lower than most forecasters and government institutions were expecting,” wrote Mike Englund, chief economist at Action Economics. “If shortages continue, the likelihood is that the more optimistic forecasts in the marketplace will need to be marked-down for Q3 as well.”

Englund said he will adjust his forecast for the second half, but now sees 2021 GDP growing by 6.1% year-over-year and 6.2% fourth quarter over fourth quarter. He said the Fed’s central tendency 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 bounced back 33.4% after the stunning collapse in the second quarter. Aside from that, it was the best growth rate since 2003.

Economists were surprised by some elements of the second-quarter report. Inventories remained a drag, while many expected businesses would begin rebuilding them. Government spending was also a 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. “At this point, we’re really in no-man’s land on the current economic data coming in. It keeps coming in softer than expected, but not at outright soft levels. I think we’re going to keep at incoming data to figure out what’s happening in Q3.”

The consumer was the bright spot, with consumption topping expectations. Consumption rose 11.8% over the first quarter, with 12% growth in services. Consumers are about 70% of all activity.

Several factors holding back growth

Worries rise over the virus

Source link

Leave a comment

%d bloggers like this: