Lofty expectations for second quarter gross domestic product (GDP) growth were left somewhat wanting as a decent headline number fell short of expectations. Peering under the hood, though, we think this is still a fairly solid report.
The Bureau of Economic Analysis released its preliminary estimate for second quarter GDP this morning, showing the U.S. economy grew at a 6.5% annualized pace against the Bloomberg median forecast for 8.4%. While this represented a small acceleration from the first quarter’s 6.3% pace, investors viewed the headline number as a mild disappointment in light of the heightened expectations. The composition of the growth, though, largely reinforces the prevailing narratives of a strong consumer juxtaposed with supply chain bottlenecks, restricting growth.
“The positive takeaway from today’s report is that we are clearly seeing a rebound in the in-person consumption of services,” said LPL Financial Chief Market Strategist Ryan Detrick. “This indicates a confidence by consumers to reengage with the parts of the economy beaten down most by COVID, and continued momentum here will be key if we are to see the consumer continue to power overall growth.”
As seen in the chart, the US consumer continued to do the heavy lifting, offsetting weakness in most other major GDP components.
Business fixed investment came in strong and demonstrated business’ attempts to ramp up output to meet surging demand. Residential investment had a more predictable decline, as well-documented labor shortages and high materials costs are restricting new projects. The volatile inventory components, though, did represent a drag.
Looking forward, we expect continued growth in the third quarter but with a different composition. Consumer spending should still be respectable, but likely will recede a bit due to the fading impact of past government transfer payments. New momentum in services as in-person commerce picks up should continue under the hood. Picking up the slack; though, business investment should continue to recover, and net exports may improve as the rest of the world plays catch-up to the U.S. in their recoveries, consuming more of our goods and services. Government spending and inventories also both have favorable outlooks.
The Delta variant of COVID-19 presents a risk to the outlook, but we see strong reason to remain optimistic. The U.S. is lagging the U.K. in its exposure to the Delta variant, and if we model our trajectory after theirs, which obviously is an imperfect comparison, we expect to see a peak in cases in the coming weeks. In fact, the U.K. is already on a strong path to recovery despite doomsday headlines. Domestically, COVID-19 cases are spiking in areas with the lowest vaccination rates. But, there is evidence that these are also the states experiencing the highest uptick in new vaccinations, which should help self-correct the trends. Positivity rates can be thought of as the fastest-twitch indicator, with hospitalization trends following in the ensuing weeks. Through that lens we see that some of the hardest hit states may have already seen their positivity rates peak.
We upgraded our 2021 forecast for U.S. real GDP growth earlier this year from 5–5.5% to 6.25–6.75%, and while there are sure to be bumps along the way, we expect to see the economy continue growing at a strong pace as activity further normalizes over the course of the year.
For further analysis on our outlook for the economy and financial markets, please check out our Midyear Outlook 2021: Picking Up Speed.
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