If 6.5% GDP is disappointing, sign me up! Especially when you dig deeper

As America opened up, we knew the economy grew in Q2, and by quite a bit. But we didn’t know how much until the Commerce Department released the GDP number today.

The U.S. economy rose at a disappointing rate in the second quarter in a sign that the U.S. has escaped the shackles of the Covid-19 pandemic but still has more work to do, the Commerce Department reported Thursday.

Gross domestic product, a measure of all goods and services produced during the April-to-June period, accelerated 6.5% on an annualized basis. That was slightly better than the 6.3% gain in the first quarter, which was revised down narrowly.

While that would have been strong prior to the pandemic, the gain was considerably less than the 8.4% Dow Jones estimate.

But you dig into the actual report, and you see that the main reason the number disappointed wasn’t due to a lack of activity, but because of higher prices.

Current-dollar GDP increased 13.0 percent at an annual rate, or $684.4 billion, in the second quarter to a level of $22.72 trillion. In the first quarter, current-dollar GDP increased 10.9 percent, or $560.6 billion (revised, tables 1 and 3). More information on the source data that underlie the estimates is available in the Key Source Data and Assumptions file on BEA's website.

The price index for gross domestic purchases increased 5.7 percent in the second quarter, compared with an increase of 3.9 percent (revised) in the first quarter (table 4). The PCE price index increased 6.4 percent, compared with an increase of 3.8 percent (revised). Excluding food and energy prices, the PCE price index increased 6.1 percent, compared with an increase of 2.7 percent (revised).

13% nominal GDP growth is a lot of extra dollars going out. And increasingly confident (and vaccinated) consumers were a big part of that growth, with an 11.8% increase in Q2 after a large 11.4% increase in Q1. Which helps explain why so many stores and restaurants are struggling to find sufficient staff after laying off large numbers of staff in 2020.

Even though services growth accounted for 60% of that strong consumption growth in Q2, that sector is still below its 2019 peak. By comparison, spending on goods never fell much when COVID first broke out, and is well above 2019 levels today.

Another item to note in this GDP report is that construction of buildings had a sizable (seasonally-adjusted decline). This continued a decline in building of office buildings and other non-residential structures in the COVID World, but residential building also went down in Q2.

I also note that there were declines in net inventories and (surprisingly) federal government consumption and contracts, which also cut into GDP growth and made it "disappoint" at a still-strong 6.5%. I don't see either of those trends continuing in the 2nd half of 2021, especially if the infrastructure package goes through. So while it wasn't the massive boom number that some might have thought, I think it's still a strong Q2 GDP report.

The groundwork is still in place for things to keep rolling, unless this COVID resurgence starts to cut into people's consumption habits, and if there is no infrastructure bill that continues to spur demand. In other words - things should still be good for Q3, as long as COVIDIOT Republicans and other idiots in DC don't screw it up.