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Initial estimates for Q2 GDP growth comes in at 6.5%

July 29, 2021 Blog 3 min read
Jim Baird Wealth Management
Today’s GDP report is a reminder that perspective is everything. Growth of 6.5% is robust by most measures, but against expectations for an advance of 8.5%, it’s still a disappointment.

GDP QoQ [Annualized % Change] - HistoryThe economy grew at a vigorous pace in the second quarter, with initial estimates for Q2 GDP growth coming in at 6.5% -- a solid outcome but well below consensus expectations of an 8.5% increase.

Consumers are the primary engine for the U.S. economy, and they did their part in recent months. Fueled by stimulus checks and emboldened by the marked decline in COVID-19 cases, consumer spending grew at an 11.8% annualized pace. Much of that came via a outsized pickup in spending on services, which had not benefited as much earlier in the recovery as social distancing measures remained in place. While a bit weaker than in the previous quarter, consumer spending on goods also expanded at a strong pace.

Despite that strength, how demand was met siphoned off some of the benefits to top-line growth. Inventories were chewed down again, trimming over 1.1% from the quarterly gain. While exports posted a solid increase during the quarter, imports were up even more, effectively trimming nearly 0.5% from growth.

The report did hold some other disappointments as well. Government spending contracted by 1.5% during the quarter, with nondefense spending off by more than 10%. It’s important to note that the focus on transfer payments to households in various forms – most notably via direct stimulus payments – doesn’t factor into the equation.

Spending on home construction fell sharply – down 9.8% annualized after three very strong advances. Surging prices and delays in the availability of building materials certainly played a key role, while tight labor markets remain a major challenge for the construction industry. Constraints on both material and labor availability are not easy to overcome and are limiting activity in the sector that has benefited from strong demand. A 7.0% decline in spending on nonresidential structures reinforces that those constraints aren’t limited to homebuyers, but represent a broader challenge for the industry.

The combination of labor and material shortages are reflections of the lingering effects of the pandemic on the global economy. Dwindling inventories and shortages across a range of industries have yet to be addressed to a meaningful degree and will take time to resolve.

Domestically, the immediate challenge is returning more sidelined American workers to employer payrolls. With job openings at record levels, the demand is there. Overcoming disincentives and hurdles including child-care challenges, ongoing health concerns, and enhanced unemployment benefits will be critical to meeting that objective. The wildcard is the growing concern about the risk presented by the COVID-19 delta variant and what its spread could mean in the coming months.

Looking toward the latter half of the year, the economy is projected to continue to expand, but gradually decelerate as some of the primary drivers behind the rebound fade. While fiscal policy should remain supportive, the government’s bazookas have already been fired. There’s still a very large pile of unspent cash in bank accounts, but the primary benefit of fiscal stimulus is almost certainly now in the rearview mirror. The Fed appears to remain committed to moving slowly to remove its accommodation, but it’s the timing – not the direction – of their next policy move that is the primary question.

Additionally, the lift provided by the reopening of the economy has already been baked in. Although capacity may increase, there’s also the growing sense that another COVID surge could be on the horizon that may dampen activity again temporarily.

The bottom line? The economy continues to grow at a robust pace – well above the long-term trend – as we dig ourselves out of the hole created by last year’s economic shutdown. That should continue, but with the potential for disappointment and some bumps along the path as bottlenecks in the global economy are cleared, hurdles to stronger job creation are cleared, and inventories are rebuilt.

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