The week in review

• Core PCE 3.5% oya in June
• Fed leaves rates unchanged

The week ahead

• Employment
• Composite PMIs

Thought of the week
Real GDP expanded at an annual rate of 6.5% in the second quarter. While output has now fully recovered its huge pandemic losses, 2Q GDP fell short of its 8.5% estimate due to an unexpected $166B drop in inventories. The contribution from inventories to quarterly GDP growth should be significant in the latter half of 2021 and early 2022. If the drawdown in inventories merely hits 0 in 3Q, then it would contribute ~3.5% to GDP growth next quarter. In addition to weaker inventories, more disappointment came from a 7.0% fall in nonresidential structures and a 9.8% decline in residential structures.

On a more positive note, the uptick in 2Q GDP was driven by an 11.8% surge in personal consumption expenditures – a key driver of economic growth. Widespread business reopenings and vaccinations benefited both growth in services (+12.0%) and goods (+11.6%). Real domestic demand was also elevated at 7.9%.

The 2Q GDP report also included the annual revision. The BEA’s initial estimates, especially for last year’s drawdown and recovery, seemed to be quite accurate with only slight revisions to 2Q20 from -31.2% to -31.4% and 3Q20 from 33.4% to 33.8%. In the 20 years prior to the pandemic recession, real GDP averaged 2.1%. Looking ahead, growth is expected to remain strong, fueled by job gains, pent-up savings and continued fiscal support. However, stickier inflation, the Delta variant, supply chain disruption and a shortage of available workers all have the potential to slow this so-far very robust recovery.

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