A National Park Service employee replaces a flag at the Washington Monument, which reopened today on July 14, 2021 after a six-month closure due to COVID-19 security measures in Washington, United States, on July 14, 2021.
Kevin Lemarque | Reuter
The US economy is expected to see another rapid growth spurt in the second quarter before a slow and steady dose of reality hits.
According to a FactSet survey, the gross domestic product is expected to grow by 9.2% from April to June. The Commerce Department will publish its first estimate of GDP for the second quarter on Thursday.
In a pre-pandemic world, annualized growth would have risen to its highest level since the second quarter of 1983. However, given current circumstances and the exaggerated policy response it has sparked, this is only the third straight quarter of GDP that is well above the post-Great Recession trend.
However, things will change.
The economy is returning to normal, the open checkbook of Congress is getting scarcer, and millions of sidelined American workers will be returning to their jobs. That means a gradual return to the mean for an economy that is more used to growing closer to 2% than the much stronger values it reached during the reopening.
“Growth has peaked, the economy will slow down a bit in the second half of this year, then more noticeably in the first half of 2022 when fiscal support wears off,” said Mark Zandi, chief economist at Moody’s Analytics. “The contours of growth in the next 18 months will be shaped to a large extent by fiscal policy. The tailwind is only blowing less strongly and could stop completely around this time next year.”
It was a long way to get here, but the economy is very close to its self before the pandemic.
In fact, according to a dial gauge owned by Jefferies, total production is 98.6% of its “normal” level before Covid-19 turned everything upside down. Using a number of indicators to measure then versus now, the company notes that while some areas such as employment and air travel are lagging behind, retail and housing construction have contributed to it, at 98.6%, total activity is just below that To push the level of 2019.
“When I look at income dynamics and household balance sheets holistically, I see a very, very positive situation, very healthy fundamentals, and it’s hard to be pessimistic about the outlook,” said Aneta Markowska, chief financial economist at Jefferies.
In fact, household net worth at the end of the first quarter was $ 136.9 trillion, up 16% from 2019 levels, according to the Federal Reserve. At the same time, household debt payments compared to disposable personal income fell to 8.2%, a record low from 1980.
Much of that net wealth, however, has been driven by the rise in financial assets such as stocks, and personal income has risen due to the slowing and eventually ceasing government stimulus payments.
Demography slows growth
In an economy that has long been held back by an aging population and poor productivity, it will be difficult to maintain such a high rate of growth. These issues are compounded by dwindling political support as well as the ongoing battle against Covid-19 and its variants, although few economists expect widespread lockdowns and the decline in activity by early to mid-2020.
“We see an economy that is growing robustly above trend, albeit more slowly until 2023,” said Joseph Brusuelas, chief economist at the consulting firm RSM. “Without any political support to increase productivity, we will at some point go back to the trend because there is not much we can do about the demographic headwinds that will eventually pull growth back into the long-term trend.”
But there are also short-term headwinds that should dampen these gaudy growth figures.
An aggressive surge in inflation due to supply constraints and huge demand related to the economic reopening will hurt production. While many economists, including the Federal Reserve, stand ready to write off inflation as a temporary measure, with soaring used car and truck prices playing a large part in this, officials like Treasury Secretary Janet Yellen warned that price hikes are likely to continue for at least several months.
Gasoline prices at a Royal Dutch Shell Plc gas station in San Francisco, California, the United States, on Wednesday, July 7, 2021.
David Paul Morris | Bloomberg | Getty Images
Inflation combined with weakening fiscal support will then also serve as a barrier to growth.
“The economy is facing supply shortages, with residential investment likely to be a drag and inventory changes remaining negative,” US economist Alexander Lin told Bank of America in a statement. “Looking ahead, this is likely to be the peak, with growth slowing in the quarters ahead.”
Capital Economics is forecasting a below consensus GDP figure of 8% for the second quarter and a decline to 3.5% for the following period.
“With prices soaring and depressing real incomes, we suspect monthly growth will remain lackluster, paving the way for a sharp slowdown in consumption and GDP growth in the third quarter,” wrote Paul Ashworth, senior North American economist at Capital Economics .
The pandemic is another wild card.
Delta variant cases are increasing in a handful of states, and health officials fear the US could see a surge affecting some European and Asian countries. Few, if any, economists expect another wave of lockdowns or similar restrictions in the US, but foreign pressures could hurt domestic growth.
“Export platforms like Vietnam are now blocked,” said Brusuelas. “Vietnam is becoming a bigger cog in the global supply chain, so we’re watching this closely.
Brusuelas added that the debt ceiling negotiations could also shake things up in the U.S. Yellen said Friday that any extraordinary measures the U.S. may need to continue paying its debt could run into trouble as early as October.
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