Growth Is Strong, but the Obstacles to Full Recovery Are Big
Most of the time, an economic growth rate of 6.5% would justify celebrations in the streets. It’s only in the weird economy of 2021 that it can be a bit of a letdown.
It’s not just that forecasters expected GDP growth to be a few percentage points higher, although they did. And it’s not even that US output remains below its prepandemic growth path in inflation-adjusted terms, though it is.
What makes Thursday’s new GDP figures less than dynamic is the extent to which they paint a picture of a nation still struggling to complete a huge economic readjustment.
The report offers sunny signs, to be sure. Growth for the first half of the year has far exceeded the rates traditional forecasters had expected at the end of last year, and strong growth in investment in commercial equipment bodes well for the future.
But it is an unequal economy – chock full in some areas, while still depressed in others. The new figures show an economy with strong demand, but where supply constraints in certain sectors are binding, reducing the overall pace of growth below what should be possible.
Consider the housing sector. The industry is booming in some ways, with house prices (and increasingly rents) rising rapidly. Yet in terms of GDP accounting, residential investment turned into a big negative in the second quarter, contracting at an annual rate of 9.8%.
If builders can’t get lumber, drywall, appliances and the like at affordable or economically reasonable prices, they can’t build homes. And so, despite tremendous demand for housing, the sector actually subtracted half a percentage point from the overall GDP growth rate.
There has been a similar 7% contraction rate in investment in corporate structures, likely reflecting a mix of supply constraints and uncertain future demand for certain categories of commercial real estate like offices and hotels.
Then there are inventories of goods, which subtracted 1.1 percentage points from the growth rate in the second quarter. Economists tend to ignore fluctuations in inventories because they tend not to reveal much about the future direction of the economy. In this case, however, the drop in inventory is revealing. This is in line with what companies are saying about having to reduce inventory as they struggle to keep up with demand (think, for example, of car sales lots with far fewer cars and trucks to choose from than usually).
Meanwhile, the great readjustment in the economy that is due to occur between consumption of goods and services – although it continued into the second quarter – still has a long way to go.
Consider a hypothetical world where the pandemic never happened, and instead the economy continued to grow as forecasters in January 2020 predicted, with different segments of GDP maintaining a constant share of the economic pie. .
Consumption of services in the second quarter remained 7.4% below the level it would have maintained in this alternative universe, while spending on durable goods remained 34% higher.
These are extraordinary changes in what the economy is set to produce, and it’s hardly shocking that the physical goods side of the economy is being strained in light of such an epic reallocation of demand. .
What has happened in recent months is not that Americans are shifting their spending from physical goods to services, but rather are buying more of both, but with varying growth rates. Spending on durable goods grew at a rate of 9.9% in the second quarter after rising 50% in the first quarter. Spending on services increased 12% in the second quarter.
These figures are, in fact, the source of supply tensions for many physical goods.
Additionally, the second quarter data predates the emergence of the Delta variant. We don’t yet know whether its spread will significantly affect the economy, but if it does, the likely effects include worsening tensions on the supply of physical goods and slowing the rebalancing of the economy towards Services.
It would be unrealistic to expect the economic trauma of 2020 to be corrected in just a few quarters, but what the data drum – both on economic output and employment – shows is that it is going to be really difficult to strike a new balance.
It’s great news, of course, that economic expansion remains robust. There was only one quarter from 2001 to 2019 in which the annualized growth rate exceeded 6%; in 2021, there are now two in a row.
Healing is happening. But the new numbers reflect just how bad the scars from last year really were.
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