What’s next for the US economy?

The US economy returned to its pre-pandemic level on Thursday, a year after it suffered its worst quarterly contraction on record.

But the lift was lower than some economists had predicted, suggesting that weaning the economy off fiscal support while Delta variant Covid-19 infections build comes with risks.

The fresh data from the S Commerce Department showed gross domestic product (GDP) had grown by 1.6 per cent in the second quarter of the year, slightly higher than in the first three months of the 2021. On an annualised basis, the world’s largest economy grew 6.5 per cent in the three months June. Many economists had expected higher growth, of around 8.5 per cent.

A fall in inventories, the goods and parts stored by retailers and manufacturers, was one of the chief reasons why GDP growth was weaker than hoped. It underlined the severe strain on supply chains after the pandemic disrupted shipping and the rest of the logistics industry. There have also been surges in demand as consumers return to spending after the lifting of restrictions.

Still, it has been a sharp turn around. Last week, the National Bureau of Economic Research, which determines whether or not the US economy has suffered a recession, said the downturn, which started in February 2020 through to April the same year, was the shortest recession ever recorded.

The fresh GDP figures also come after the US Federal Reserve signaled on Wednesday that it was considering easing its support, known as quantitative easing, by trimming the number of bonds it buys in coming months. The Fed has been especially cautious in its communications about easing debt buying after the 2013 so-called “taper tantrum” when it said it would ease its monetary support triggering a market sell-off by investors.

Even with economic output falling short of expectations, economists told The Independent they are optimistic about the outlook in the US.

“I’m not troubled by the headline figures,” says Ian Shepherdson, founder and chief US economist at Pantheon Macroeconomics. “The main thing is that consumption is charging along. Business investment is coming along. Everything else is meh, but those are the two main things.”

Economists and investors watch consumer spending and business investment closely because collectively they account for around 80 per cent of economic activity. Consumers’ spending capabilities had also received a significant boost in March and April, via stimulus checks.

“There’s every reason to be quite optimistic about the second half of this year,” says Mr Shepherdson. “Consumption was double digit in the second quarter, 11.8 per cent. That’s not sustainable but that’s fine. People have got a huge amount of savings that they’ve accrued.”

Financial markets are also, so far, proving relatively calm about the prospect of the Fed’s imminent tapering of debt purchases.

It was just “another very slow, very cautious, baby step towards the exit door”, says James Athey, investment director at Aberdeen Standard Investments. Still, the approach showed the central bank is nervous of any shock to markets: “It was a prewarning, ahead of a warning, ahead of tapering,” he says.

Yet while investors have stayed relatively sanguine about the prospect of tapering, economists are worried about the impact of the Delta variant on the US recovery.

There are significant proportions of the population in some Southern states, which are now seeing a rapid rise in infections. The country is averaging around 60,000 confirmed new cases a day, a sharp increasing on a rate of about 12,000 per day last month.

“Cases there will go up. It’s very hard to know how far this will go,” says Mr Shepherdson. There are some states where well under 40 per cent of the population are vaccinated, he added.

However, it is hard to tell if there would be political appetite to reintroduce any restrictions to try and stem a tide of cases. Many economists do not expect severe reactions. More likely, provided hospitalisation rates do not threaten to overwhelm healthcare services, is that consumers will be a little more cautious, with mild economic impact.

“I don’t think it’s going to elicit the same level of response from state governors in waves past,” says Mr Athey.

And while economic output has beaten back Covid-19, the same isn’t true of the labour market. Unemployment is still well below levels seen before the pandemic took hold in the US and around the world. There are around seven million fewer jobs than before the economy shrank, according to the US Bureau of Labor Statistics.

Reaching pre-pandemic GDP levels still means there’s lost growth: the expansion that would have taken place without lockdowns and deaths. And the picture could darken a little in the coming weeks, however, even if the economy is back on track after the pandemic pushed it into contraction.

“We’ve got to recover the ground that was lost,” says Mr Shepherdson. “That will start, hopefully at the beginning of next year.”

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