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U.S. Economy: Losing Steam, But Moving Forward

Research & Strategy August 03, 2021
Research & Strategy August 03, 2021
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The weaker Q2 GDP result—just 6.5% annualized when 8.5% was expected—and a mix of headwinds has spurred another downward revision to our U.S. economic outlook. We lowered our Q3 growth call to 6.0% (from 7.5%), while keeping Q4 at 5.0%. This carved the 2021 annual rate by half a percentage point to 6.0% and the 2022 pace a few notches to 4.0%. The GDP report showed another massive decline in business inventories, confirming what businesses have been saying all year: supply shortages are preventing them from ramping output to meet pent-up demand. And, demand was hopping in Q2, with consumer spending accelerating 11.8% annualized and business spending staying strong despite continued weakness in commercial construction. The combination of stimulus, reopening and vaccinations continued to overwhelm other hurdles. However, the June personal spending report confirmed that most of the Q2 binge stemmed from March’s high jump-off point, courtesy of a second round of rebate cheques. Spending volumes fell modestly in the May-June period, despite a partial rebound in June.

Besides supply shortages, notably of workers, two other headwinds are clamping down on growth. The first is spiking prices. Even if most of the jump in inflation proves temporary, price levels will be much higher than anyone foresaw at the start of the year, eroding purchasing power unless wages keep up. But, so far, the employment cost index is rising only moderately, 2.8% in the past year to Q2, a full percentage point slower than PCE prices. Does anyone think that used car sales won’t be dented by a 45% jump in prices in the past year? In the housing market, a 17% y/y surge in home values has already taken the steam out of sales.

The second headwind is the Delta variant, which is seeing caseloads rise across the country and even hospitalizations turning up in a number of states, including Florida even though its inoculation rate is only modestly below the national average. While this new wave might not lead to severe restrictions (a few cities have re-imposed mask mandates but not initiated new curbs on activity), it could lead to increased hesitancy to travel, dine out, or pursue indoor entertainment. Receding case counts in the UK and the Netherlands are encouraging, but we still don’t know the course the Delta variant will take.

The toxic mix of supply shortages, demand-sapping price hikes, and virus uncertainty will counter some of the thrust from excess savings, record wealth, and rising employment. At the same time, while the fiscal proposals to rebuild the nation’s infrastructure and social programs are likely to support activity, they will do so in a more incremental fashion than the earlier rescue and stimulus plans. As well, with GDP now regaining its recession losses, there is less room to expand. The days of gangbuster growth are likely behind us. That said, the headwinds will slow, rather than stop, the economy’s forward motion. We still expect growth to average 5.5% in the second half of the year, three-times faster than long-term potential. And 2021 will still mark the economy’s best performance in 37 years.


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Sal Guatieri Director and Senior Economist

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