US economy grows solidly in Q2; labour market healing

Washington

THE United States economy grew solidly in the second quarter, but the pace was below expectations as robust consumer spending and business investment on equipment were tempered by a sharp inventory drawdown amid supply chain constraints.

Gross domestic product (GDP) increased at a 6.5 per cent annualised rate last quarter, the Commerce Department said on Thursday in its advance estimate of second-quarter GDP. The economy grew at a 6.3 per cent rate in the first quarter, revised down from the previously reported 6.4 per cent pace. Economists polled by Reuters had forecast GDP rising at an 8.5 per cent rate last quarter.

With the second-quarter estimate, the government published revisions to GDP data, which showed the economy contracting 3.4 per cent in 2020, instead of 3.5 per cent as previously estimated. That was still the biggest drop in GDP since 1946.

The revisions to growth in other years and quarters were minor. From 2015 to 2020, GDP increased at an average annual rate of 1.1 per cent, unrevised from previously published estimates. The National Bureau of Economic Research, the arbiter of US recessions, declared last week that the pandemic downturn, which started in February 2020, ended in April 2020. Even with the second quarter marking the peak in growth this cycle, the economic expansion is expected to remain solid for the remainder of this year.

A resurgence in Covid-19 infections, driven by the Delta variant of the coronavirus, however, poses a risk to the outlook. Higher inflation, if sustained, as well as ongoing supply chain disruptions could also slow the economy.

The Federal Reserve on Wednesday kept its overnight benchmark interest rate near zero and left its bond-buying programme unchanged. Fed chair Jerome Powell told reporters that the pandemic's economic effects continued to diminish, but risks to the outlook remain.

Economists expect growth of around 7 per cent this year, which would be the strongest performance since 1984. The International Monetary Fund on Tuesday boosted its growth forecasts for the US to 7.0 per cent in 2021 and 4.9 per cent in 2022, up 0.6 and 1.4 percentage points respectively, from the forecasts in April.

President Joe Biden's administration provided US$1.9 trillion in pandemic relief in March, sending one-time US$1,400 cheques to qualified households and extending a US$300 unemployment subsidy through early September. That brought the amount of government aid to nearly US$6 trillion since the pandemic started in the US in March 2020.

Nearly half of the population has been vaccinated against Covid-19, allowing Americans to travel, frequent restaurants and attend sporting events among services-related activities that were curbed early in the pandemic.

Consumer spending, which accounts for more than two-thirds of the US economy, grew at an 11.8 per cent rate in the second quarter, boosted by demand for services. While spending on goods remained strong, the pace likely slowed from earlier in the pandemic, when Americans were cooped up at home.

Though the fiscal boost is fading and Covid-19 cases are rising in states with lower vaccination rates, consumer spending will likely continue to grow. Households accumulated at least US$2 trillion in excess savings during the pandemic.

Record high stock market prices and accelerating home prices are boosting household wealth. Wages are also rising as companies compete for scarce workers amid a strengthening labour market.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell by 24,000 to a seasonally adjusted 400,000 for the week ended July 24.

Economists polled by Reuters had forecast 380,000 applications for the latest week. Claims jumped in the week ended July 17, but economists blamed the surge on difficulties stripping out seasonal fluctuations from the data.

Before the pandemic vehicle plants shut in early July for retooling, which caused a temporary rise in layoffs, which then reversed in the second half of July. A global semiconductor shortage has forced some carmakers to either scale back or temporarily idle production lines.

The supply constraints are making it difficult for businesses to replenish stocks. Inventories dropped at a rate of US$165.9 billion in the second quarter, subtracting 1.13 percentage point from GDP growth. REUTERS