U.S. GDP trails forecast even as consumer spending surges
U.S. growth missed forecasts in the second quarter as the effects of supply-chain constraints reverberated through the economy and took the shine off one of the biggest gains in consumer spending in decades.
Gross domestic product expanded at a 6.5% annualized rate following a revised 6.3% pace in the first quarter, the Commerce Department's preliminary estimate showed Thursday.
The report underscores the robust bounce back in household demand as well as the challenges companies are facing keeping pace with that demand. Firms' inability to keep merchandise stocked and bottlenecks in production have capped the speed at which the U.S. pandemic recovery can grow.
"The downside surprise in the GDP numbers is mostly in the inventory component," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note. "We are not disappointed by the headline GDP growth miss."
The median forecast in a Bloomberg survey of economists called for an 8.4% increase in GDP. Shepherdson said he expects a big rebound in inventories and is penciling in third-quarter growth of 8% or more.
The S&P 500 climbed after the report, the yield on the 10-year Treasury note rose and the dollar weakened on expectations that the figures will encourage the Federal Reserve to maintain its support for the economy.
Personal consumption exceeded forecasts as Americans had both the wherewithal and the opportunity to ramp up spending on services such as dining out. Vaccinations, government aid and a broader reopening of the economy helped drive an annualized 11.8% gain, the second-largest advance since 1952.
At the same time, inventories took a 1.1 percentage points bite out of second-quarter GDP, while residential investment reduced growth by about 0.5 percentage point.
"The second-quarter GDP report is stronger than it looks, with measures excluding trade and inventory drag far outpacing the 6.5% headline gain," Bloomberg economists Andrew Husby, Eliza Winger and Niraj Shahwrote in a note. "More ambitious marks like pre-pandemic trend, or closing the gap to some estimates of potential, is in reach within a few quarters."
The report showed the U.S. economy has recouped its pandemic losses. The inflation-adjusted value of domestically produced goods and services climbed to an annualized $19.36 trillion, eclipsing its pre-pandemic peak.
Looking ahead, economic growth will be challenged by waning federal support, a rapidly spreading variant of Covid-19, and lingering supply and labor constraints. The report showed the saving rate dropped to 10.9% in the second quarter from 20.8%, indicating Americans are spending cash built up during the pandemic.
Businesses have struggled to keep pace with the outpouring of pent-up demand, pushing prices skyward and eroding recent wage gains. The personal consumption expenditures price index excluding food and energy costs, followed closely by Fed officials, climbed an annualized 6.1% in the second quarter, the biggest gain since 1983.
Unlike output, the jobs market is far from reaching its pre-pandemic strength. The Fed held interest rates near zero this week and maintained its pace of asset purchases.
"We're not there. And we see ourselves as having some ground to cover to get there," Fed Chair Jerome Powell said at a press conference Wednesday.
Supply shortages and logistics challenges are proving to be a lingering headwinds for companies including Apple Inc., Fastenal Co. and Whirlpool Corp., according to recent earnings calls.
Supply is well short of demand, allowing us to keep pricing strong, said Ford Motor Co. Chief Executive Officer James Farley on the company's earnings call Wednesday. "Given the strength of our product lineup and the demand we see, we expect to have a relatively strong pricing power for the new foreseeable future."
For the Biden administration, the supply-chain bottlenecks weighing on the figure may support calls for broader infrastructure investment.
Second-quarter growth was also bolstered by continued strength in business investment. Driven by equipment and intellectual property, non-residential outlays rose an annualized 8%, the fourth-straight quarterly advance.
The Commerce Department also released its annual update Thursday, which resulted in mostly minor changes in the pattern of growth and inflation over the last five years. Corporate profits were found to be stronger than originally reported in recent years.
- Excluding the trade and inventories components of GDP, final sales to private domestic purchasers, a gauge of underlying demand, rose at a 16.5% pace after a 16% gain in the first quarter.
- Net exports subtracted 0.44 percentage point from growth.
- Business outlays for structures declined an annualized 7%.
- Services added 5.1 percentage points to second-quarter growth. Outlays for merchandise remained solid as well, rising 11.6%.
- Motor vehicle output shrank an annualized 16.2% in the second quarter; excluding auto output, GDP advanced 7.2%.