U.S. GDP Data for Q2 Points to a Slow Recovery

The U.S. economy grew slightly in the second quarter, missing economists’ expectations. They had hoped that the lingering effects of fiscal and monetary stimulus and strong consumer and business demand would fuel further growth. We dig into the data and other economic indicators as we also see an increase in Covid-19 Delta variant cases likely being a setback.

The U.S. Bureau of Economic Analysis released its advanced estimate of second-quarter gross domestic product (GDP) on July 29th. The Q2 GDP, seasonally adjusted annualized quarter-over-quarter, was 6.5%, below economists’ expectations of 8.4%. On the positive side, personal consumption rose 11.8%, doing better than the expected 10.5% increase and above 11.4% in the first quarter.

Consumers are an important driver of economic activity, and unfortunately, consumption will likely decelerate. Consumer spending in the first half of the year was mainly spurred by government-issued stimulus checks. Consumers are signaling more uncertainty about the overall state of the economy and their finances, according to the Forbes Advisor-Ipsos U.S. Consumer Confidence Weekly Tracker. [1] Pandemic cases are rising, which is causing some local/state government officials to impose more social distancing restrictions or cause some consumers to pull back on shopping.

The factors that weighted down second-quarter economic activity were fast-rising imports and slower-rebounding exports, continued challenged supply chain efficiencies, and rising input costs such as commodities. According to the U.S. Commerce Department, the U.S. trade deficit in goods rose 3.5% in June to a record $91.2 billion. Goods imports edged up 0.3% to $145.6 billion, while imports climbed a much faster 4.7% to $236.7 billion, which is also a record high. [2]

The U.S. has run trade deficits for decades. The record surge in deficits this year largely stems from the U.S. recovering faster than most countries from the pandemic. Americans can afford to buy more imports, but people in other countries have less ability to do so as their economies struggle.

Economists predict hiring in the U.S. slowed in July after accelerating the previous month. They expect the Labor Department will report August 6th that nonfarm employers added 650,000 jobs in July. That would be down from June when employers added 850,000 jobs. The stronger payroll gain in June probably wasn’t the start of a sustained acceleration; the Bureau of Labor Statistics noted the gain mainly reflected a seasonal distortion. [3]

This all points to the initial bump in re-opening starting to fade. Wall Street has already begun to temper expectations. Goldman Sachs cut its outlook for third- and fourth-quarter recovery, citing a slower service-sector recovery given recent Delta variant fears. [4]

Fed Chair Jerome Powell has said repeatedly that it is still “some way away” from making the substantial further progress needed to begin tapering its asset purchases. “The path of the economy continues to depend on the course of the virus,” Fed policymakers said in a statement following their meeting in July. While the pace of economic activity has strengthened, risks remain, they noted. [5]

For investors this means the mix of uncertainty about the Delta variant and continued reopening in the economy lends itself to a more balanced approach. Diversification will provide a stabilizing effect to your portfolio when some sectors and asset classes move higher and others go lower.

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[1] Forbes. “Consumers Still Support Economic Reopening, But Feeling Unsettled As Delta Variant Spreads,” Aug. 2, 2021.

[2] MarketWatch.com. “U.S. trade deficit in goods climbs 3.5% in June to $91.2 billion and hits another record high,” July 28, 2021.

[3] Capital Economics. “US Economics Weekly,” July 30, 2021

[4] Reuters. “Goldman Sachs trims U.S. growth forecasts on slower service sector recovery,” July 26, 2021.

[5] Federal Reserve. Press Release, “Federal Reserve issues FOMC statement,” July 28, 2021.

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