Thursday 29 July 2021 1:43 pm

US economic growth falls short of expectations

The US economy is rebounding sharply from the damage inflicted on it by the Covid crisis, but output growth is falling well below analysts’ expectations, new figures released today reveal.

The Commerce Department estimated the US economy grew at an annualised rate of 6.5 per cent in the second quarter of this year, driven by the rapid vaccine rollout and enormous government stimulus measures triggering a burst in consumer spending.

Thanks to the output boost, the US economy is now above its pre-pandemic peak.

Read more: US inflation surges at fastest pace in over a decade

However, economists polled by Reuters expected the American economy to grow around an eight per cent annualised rate. Growth was tempered by firms struggling to expand production at normal rates amid severe supply chain constraints, worker shortages and low inventories.

As part of the forecasts, the US government revised down GDP data for 2020, which now shows the economy contracted 3.4 per cent last year – still the biggest drop since 1946.

Willem Sels, chief investment officer in HSBC’s private banking and wealth management unit, said: “Consumption was the main driver and its recovery continues in earnest, driven by the reopening, a strong jobs market, rising house prices and strong consumer confidence.”

Despite coming in below forecasts, the US economy is in good shape and the recovery is expected to extend throughout 2021.

Yesterday, the Federal Reserve said it was encouraged by data showing sectors hardest hit by Covid are recovering quickly, and noted the economy was making significant progress.

Separate data published by the Labour Department showed the US labour market is strengthening, with initial claims for state unemployment benefits falling 24,000 to a seasonally adjusted 400,000 in the week ended July 24.

The growth in output has been mainly fuelled by the successful rollout of Covid vaccines enabling states across the US to end restrictions on sectors of the economy that rely on social and face-to-face interaction to generate income.

Services makes up around two thirds of the US economy, meaning the reopening of bars and restaurants has boosted output.

Personal consumption hit 11.8 per cent, much better than the 10.5 per cent analysts had expected.

Spending has also been boosted by the US government supporting incomes by distributing $1,400 to qualifying households.

Read more: Fed says US economy has ‘made progress’ but holds rates at near-zero

Inflation and rising infections could temper growth

Despite positive output growth, the US economy is still facing strong headwinds from surging inflation and the rapid spread of the Delta variant of Covid.

Prices rose at the fastest annual rate in the US since 2008 last month, indicating that consumers may start to hold off on spending until inflation eases to protect their income.

Covid rates are increasing sharply in many states, which may prompt policymakers to reintroduce restrictions on economic activity. However, vaccine take up has been strong, meaning high virus transmissions may not result in the same level of hospitalisations seen in previous waves.