‘Hot’ US Economy Underwhelms Despite Spending Spree

The US economy expanded at a 6.5% annual clip in the second quarter, the government said Thursday.

That was woefully short of consensus. The market wanted 8.4% (figure below). The range, from nearly six-dozen economists, was 6% to 11.2%.

Although activity in the world’s largest economy is generally expected to remain a semblance of robust going forward, concerns around “peak growth” are rampant.

The spread of the Delta variant, rising US cases and associated new containment measures have weighed on market sentiment, even as domestic equities remain near record highs. No one should be surprised if growth estimates are revised lower in the months ahead.

That said, additional fiscal measures may help offset any drag from the worsening virus outlook. Both the bipartisan infrastructure bill and a Democrat-only reconciliation measure were poised to advance on the Hill.

Assuming both make it through what it’s fair to describe as a laughably fraught legislative process bedeviled by some of the worst partisan rancor in modern US history, Joe Biden will have largely succeeded in enshrining his economic agenda into law. It’s ambitious relative to the norm. Not so much in the eyes of Progressives. Either way, it’ll be an economic boon. Contrary to what you might be inclined to believe if you get your information from dubious sources, demand-side stimulus does work. It’s just a matter of assessing any associated side effects. Supply-side stimulus, on the other hand, has virtually no serious claim on efficacy, unless you confine your definition of good policy outcomes to those that entail lower taxes for corporations and deregulation.

The biggest question mark for the economy headed into the back half of 2021 is whether and when workers will return to the services sector, which is still well off pre-pandemic levels of employment. Personal consumption rose 11.8% in Q2, Thursday’s data showed (figure below). That was better than the 10.5% economists expected.

“The increase in real GDP in the second quarter reflected increases in personal consumption expenditures, nonresidential fixed investment, exports, and state and local government spending,” the BEA said.

Nonresidential fixed investment rose 8% in Q2, a marked deceleration from Q1’s 12.9% pace (figure below).

Final sales to domestic private purchasers rose nearly 10%, robust, but lower than Q1’s 11.8%.

The value of goods and services produced domestically rose to an annualized $19.36 trillion, above the pre-pandemic high.

Increases were partially offset by declines in private inventory investment, residential fixed investment, and federal government spending.

The contraction in residential investment (figure below) made an already silly-looking chart even sillier.

Thursday’s release incorporated revisions back to 1999.

The generic narrative will just be that personal consumption was better than expected, which is obviously good news for an economy that lives and dies by the consumer. Goods consumption contributed 2.68% in the second quarter compared to 5.69% in Q1. Services spending’s contribution last quarter was more than 5% compared to just 1.75% during the first three months of the year. More generally, I suppose you could also argue that a slower pace of growth in the second quarter means less of the recovery was pulled forward, but it was far from clear that any “leaving some for later” thesis would be welcome.

Given myriad challenges ahead including the overhang from a potential new surge of virus infections, lingering supply chain problems and less generous government benefits, the outlook is uncertain, especially considering ambiguity around inflation and the effect of rising prices on consumer psychology.

Core PCE rose 6.1% in Q2, in-line with estimates, but still the largest jump since 1983 (figure above).

“A strong quarter to be sure [but] to some extent it has to bring into question the Fed’s projection of 2021 growth at +7.0%,” BMO’s Ian Lyngen said. “It would have to be a very strong H2 as well.”


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3 thoughts on “‘Hot’ US Economy Underwhelms Despite Spending Spree

  1. Numbers are setting up a surprise to the upside. What’s the analyst taking their low risk approach of continuation. I expect dire and four from all analysis and talking heads for the next 3 months. They will be correct about stoking fear but wrong about the future it seems. I believe Scott Gottlieb has a reasonable communication the virus progression, the virus will burn itself out rather quickly. He is not constrained as Faucci is to not predicting the future.

  2. I can’t figure out what’s wrong with the economy given the perspective of where we’ve been and where we are hopefully going (upward, whatever that means). Does someone posses an accurate model of how global economies should come out of a pandemic so we have something to compare to. If the economy is really going to generate solid and sustainable growth, the general mood is going to need to improve. Politicians are the weak link at this point. As a group their strength is creating angst.

NEWSROOM crewneck & prints