US: GDP growth to remain generally solid in coming quarters – Wells Fargo

Data released on Thursday showed the US economy expanded at a 6.5% annual rate during the second quarter, below the 8.5% of market consensus. Despite the lower-than-expected growth rate, real GDP has now surpassed its pre-pandemic peak, said analysts at Wells Fargo. 

Key Quotes: 

“Despite the lower-than-expected growth rate in Q2, real GDP is now 0.8% higher than it was at its pre-pandemic peak in Q4-2019. That said, output is still 2.5% below where it would have been had the pandemic never happened and real GDP would have grown at its 2010-2019 average rate of 2.3% (annualized) per quarter. In other words, there is still an "output gap," which is consistent with the level of payrolls still 4.4% below their pre-pandemic peak.”

“Growth in real GDP in the second quarter was driven largely by consumer spending. Real personal consumption expenditures (PCE) shot up 11.8%, which was stronger than most analysts had expected, and every major category of spending posted solid gains.”

“We look for overall GDP growth to remain generally solid in coming quarters. Consumers remain flush with cash and there still is pent-up demand for spending on services. Additionally, recent monthly data on factory orders suggest that business spending on equipment remains solid. These orders will need to be produced in coming months.”

“The recent surge in COVID cases represents a downside risk to the economic outlook. We do not expect that the economy will lock down as it did a year ago. That said, consumers could potentially become more cautious regarding travel, restaurant dining, stadium attendance, etc. if cases surge significantly higher.”

“The data contained in today's release are another indication that inflation remains a problem. The PCE deflator, which is a measure of consumer prices, jumped at an annualized rate of 6.4% in Q2, the largest sequential increase since 1982. This marked increase in consumer prices in the second quarter reflects the combination of strong growth in consumer spending and constrained supply.”