U.S. economic growth stayed strong in the second quarter as rising vaccinations and a return to pre-pandemic activities unleashed a wave of pent-up demand, according to data released Thursday by the Commerce Department.
Gross domestic product (GDP) grew at a seasonally adjusted annualized rate of 6.5 percent from April to June, the Commerce Department said, slightly higher than the 6.3 percent grate from the first quarter.
The annualized growth rate indicates how much the U.S. economy would have grown if the second quarter’s pace had lasted for 12 months, and the new figures helped push total GDP past its pre-pandemic peak in February 2020, effectively closing the gap in output from COVID-19.
A number of economists had expected GDP to grow roughly 8 percent in the second quarter, according to a consensus of estimates, as an American public increasingly vaccinated against COVID-19 returned to restaurants, bars, hotels, entertainment venues, sports events, and vacations hindered by pandemic-related restrictions and health concerns.
The $1.9 trillion COVID-19 economic relief bill signed by President Biden in late March also helped GDP expand. But, a sharp jump in inflation, supply shortages driven by the reopening rush, and the surge of the COVID-19 delta variant later in the quarter caused some analysts to trim down their estimates shortly before Thursday’s report, which came in well below expectations.
“The second-quarter increase in real GDP reflected increases in consumer spending, business investment, exports, and state and local government spending that were partly offset by decreases in inventory investment, housing investment, and federal government spending. Imports, a subtraction in the calculation of GDP, increased,” the Commerce Department said.
Consumer spending rose at an annualized pace of 11.8 percent in the second quarter, slightly higher than the first quarter pace of 11.4 percent, as Americans shifted their purchases from goods to services.
Spending on all goods rose at an annualized 11.6 percent in the second quarter, down from 27.4 percent in the first, while growth in spending on services rose from 3.9 percent to 12 percent between April and June.
“The long awaited pivot to services demand began in the second quarter of 2021,” wrote Joe Brusuelas, chief economist at audit firm RSM.
While consumers ramped up their spending in the spring, gross private domestic investment—a key driver of economic productivity—fell at 3.5 percent annualized rate in the second quarter, falling deeper from the first quarter’s decline of 2.3 percent.
Investment in both residential and non-residential buildings fell by annualized rates of 9.8 percent and 8 percent each, likely due to surging prices for construction materials, but growth in investment in equipment and intellectual property stayed at double digit rates in the second quarter.
Biden administration officials and Democratic lawmakers credited the president’s plans to end the pandemic and boost the economy for much of the second quarter’s strength, arguing that growth has exceeded the pace expected before Biden signed the massive stimulus bill into law.
“Here’s clear evidence that shots in arms and checks in pockets helped to get it there. Check out these pre-policy forecasts from last year against the actual outcome from this morning’s report,” wrote Jared Bernstein, a member of the White House Council of Economic Advisors (CEA), on Twitter.
Even so, Republican lawmakers are likely to blame Biden for second quarter growth coming in under expectations and the high inflation that came with it.
The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, rose at an annualized rate of 6.4 percent in the second quarter, up from 3.8 percent in the first. The PCE price index minus food and energy prices, which are more volatile, rose 6.1 percent annualized after rising 2.7 percent in the previous quarter.
Prices for goods have risen sharply over the start of 2021 as producers struggle to reach surging demand and battle through an obstacle course of shortages and supply chain bottlenecks. While inflation was destined to rise after prices plummeted in 2020, the current pace of price increases has far exceeded economists expectations and alarmed many consumers.
Republicans have seized on inflation fears as they attempt to take back control of Congress in 2022 and battle Biden’s push for a roughly $3.5 trillion infrastructure and social services bill on top of the bipartisan framework currently advancing through the Senate.
“While spending is returning to pre-pandemic trends, rising inflation means that Americans are getting less for their money as workers, firms, and supply chains strain to meet customer demand. These problems are best repaired by the private sector, not additional stimulus, and I am confident in the ability of innovative Americans to solve these challenges in the months ahead,” said Sen. Mike Lee (R-Utah), vice chair of the Joint Economic Committee.
Many economists—including Fed Chair Jerome Powell—say price growth will cool down once several pandemic-related supply challenges are eliminated.
“If you look at the most recent inflation report, what you see is that it came in significantly higher than expected, but essentially all of the overshoot can be tied to a handful of categories, and it isn’t the kind of inflation that’s spread broadly across the economy,” Powell told reporters Wednesday.
“It’s new, used and rental cars. It’s airplane tickets. It’s hotels. It’s a couple of other things. And each of those has a story attached to it that is really about the reopening of the economy.”
Updated at 10:22 a.m.