U.S. economy expanded at 6.5% annualized rate in Q2, missing expectations

·4-min read

Growth in U.S. economic activity accelerated only slightly in the second quarter compared to the first, disappointing economists expecting that the lingering effects of fiscal and monetary stimulus and strong consumer and business demand would fuel further growth. 

The U.S. Bureau of Economic Analysis released its advanced estimate of second-quarter gross domestic product (GDP) Thursday morning at 8:30 a.m. ET. Here were the main metrics from the report compared to consensus data compiled by Bloomberg: 

  • Q2 GDP, seasonally adjusted annualized quarter-over-quarter: 6.5% vs. 8.4% expected and a downwardly revised 6.3% in Q1

  • Personal consumption: 11.8% vs. 10.5% expected and 11.4% in Q1

  • Core personal consumption expenditures, quarter-over-quarter: 6.0% vs. 6.1% expected and an upwardly revised 2.7% in Q1

The headline print in quarterly GDP missed the mark even as consumer spending, the biggest component of U.S. economic activity, exceeded expectations. Personal consumption rose at an 11.8% rate in the second quarter, unexpectedly accelerating from the first quarter's 11.4% growth rate and handily topping expectations for a 10.5% increase. 

Heading into Thursday's report, the Commerce Department's monthly retail sales figures grew in April and June during the quarter, and have held markedly higher on a year-over-year basis since the summer of last year. These positive trends in consumption, though, are seen decelerating going forward after government-issued stimulus checks turbo-charged consumer spending at the start of the year. 

However, other areas of the economy served as drags to second-quarter economic growth. Net exports shaved off 0.44 percentage points from headline GDP, with fast-rising imports and slower-rebounding exports during the economic recovery weighing on overall U.S. output. The results tracked with other recent economic data like the Commerce Department's June advanced goods trade deficit, which showed the U.S. merchandise trade gap yawned to the second-largest ever recorded at the end of the second quarter. 

And government consumption expenditures swung from contributing to growth in the first quarter of 2021 to detracting from growth in the second, with government spending subtracting nearly 0.3 percentage points from GDP. 

People walk down 5th Avenue on a warm day on June 7, 2021 in New York City. (Photo by Angela Weiss / AFP) (Photo by ANGELA WEISS/AFP via Getty Images)
People walk down 5th Avenue on a warm day on June 7, 2021 in New York City. (Photo by Angela Weiss / AFP) (Photo by ANGELA WEISS/AFP via Getty Images)

Soaring demand has sparked supply chain constraints and rising input costs during the quarter, offsetting GDP growth as well. And residential fixed investment slowed as fast-rising home prices and tight inventory weighed on the housing market, with this category shaving off nearly 0.5 percentage points from headline GDP. 

"In short, Q2 GDP was weaker than expected. Household spending and business investment provided a strong lift but inventories, residential investment, government spending and net exports were drags on growth," Rubeela Farooqi, chief U.S. economist for High Frequency Economics, wrote in a note. "The level of output surpassed the pre-pandemic level in the second quarter with GDP 0.8% above where it was in Q4-19."

"A solid pace of growth in Q2 is expected to moderate in the second half of 2021," Farooqi added. "The extent of slowdown is still not clear, but we expect GDP growth to remain above trend over coming quarters." 

'Middle of the cycle'

Many economists expected last quarter to mark the top of the recovery growth rate for the U.S. economy, with crisis-era fiscal and monetary policy support now waning, and the initial bump in reopening-related spending starting to fade. 

And Wall Street has already begun to temper expectations: Goldman Sachs cut its outlook for third- and fourth-quarter GDP growth earlier this week, citing a slower service-sector recovery given recent Delta variant fears. 

"We do see a decelerating growth environment," Matt Miskin, John Hancock Investment Management co-chief investment strategist, told Yahoo Finance. "The end of the first quarter was really the peak in the economic growth rate."

Still, "we're still going to be growing at likely mid-single digits here into the third quarter. And then as we get into next year, we think it's more like a low-single digit growth environment that we used to have in past cycles. We believe we're in the middle of the cycle." 

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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