2Q GDP Reacts to Supply Constraints While Fed Policy Remains Unchanged

The economy expanded less than the forecasted 8.4% annualized in the second quarter, held back by primarily by supply constraints. Companies were, against expectations, unable to replenish depleted inventories and with builders struggling to obtain supplies, residential construction subtracted from growth.

GDP rose only 6.5% from the previous quarter at an annualized pace, after a slightly downward revised 6.3% gain in the first quarter. Consumer spending surged, with Americans laying out more money on both services and goods. Clothing and restaurants were among the categories leading gains. Consumption advanced 11.8% at an annualized rate, even faster than the 11.4% of the previous quarter.

The economy expanded less than the forecasted 8.4% annualized in the second quarter, held back by primarily by supply constraints. Companies were, against expectations, unable to replenish depleted inventories and with builders struggling to obtain supplies, residential construction subtracted from growth.

GDP rose only 6.5% from the previous quarter at an annualized pace, after a slightly downward revised 6.3% gain in the first quarter. Consumer spending surged, with Americans laying out more money on both services and goods. Clothing and restaurants were among the categories leading gains. Consumption advanced 11.8% at an annualized rate, even faster than the 11.4% of the previous quarter.

Jobless claims remain stubbornly high

Initial claims for unemployment were higher than expected last week, at 400,000, but still ticked down from its previous weekly level of 424,000, an upward revision from its previously reported 419,000 claims:

No new information from the Federal Reserve

Thursday, the Federal Reserve Open Market Committee (“FOMC”) left interest rates unchanged with the fed funds rate at 0.00%-0.25%, where it has been since March 2020. The FOMC statement said that “sectors most adversely affected by the pandemic have shown improvement but have not fully recovered.”  While the statement noted improvements in economic activity, it also reinforced the notion that “the path of the economy continues to depend on the course of the virus.”

There was no change to the Fed’s asset purchase plan, as current activity will continue “until substantial further progress has been made toward its maximum employment and price stability goals.” Currently, the Fed purchases at least $80 billion of Treasury securities and about $40 billion of mortgage-backed securities (“MBS”) each month. The current thought is that the Fed may announce plans this autumn to taper back purchases as early as the beginning of 2022, most likely in the MBS market before cutting back U.S. Treasury purchases, which would need to be a more delicate process.

The FOMC statement noted that the economy continues to improve toward the committee’s goals, and that “the committee will continue to assess progress in coming meetings,” reinforcing the forecast that officials are getting closer to tapering. But the statement provides no specific timeline, leaving markets to assume the timeline will depend on inflationary pressures and the course of the virus and its effects on continued economic and labor growth.