Economists foresee the recovery from the pandemic transitioning to a new phase.
After a blistering first half recovery from the pandemic, what does the U.S. economy have in store for the second half?
The answer to that question will depend on many factors that have yet to play out.
With more than half of Americans fully vaccinated against the coronavirus, how many more will get a vaccine and how many will be at risk for the new delta variant that is now gaining a hold in the country?
What effect will the lack of any further economic stimulus, as well as the curtailment or expiration of enhanced unemployment benefits, have on income levels, consumption patterns and personal spending of consumers?
And how does rising inflation affect corporate profits, worker wages and overall consumption in an economy that relies on consumers for more than 70% of its growth?
“We still see positive growth but at a slower pace,” says Lindsey Piegza, chief economist at Stifel. “There’s a recalibration of pent-up demand flooding into the marketplace.”
The economy has made a remarkable recovery from the depths of the pandemic-induced recession. The unemployment rate has fallen from a high of 14.8% in April 2020 to 5.8%, and gross domestic product – which declined a record 31.7% in the second quarter of 2020 – rose 6.4% in the first quarter of 2021. The Federal Reserve forecasts full-year 2021 GDP at 7%.
But, those improvements come off a low base. Going forward, the comparisons will be tougher and the pace of recovery likely will slow. The Fed expects the rate of GDP growth to be 3.3% next year and then 2.4% in 2023.
“Glenmede’s Reopening Index now stands at 100%, suggesting that all the economic activity lost during the recession has been regained,” Jason Pride, Glenmede Trust’s chief investment officer wrote Monday. “While some further recovery is needed to reestablish the economy’s previous growth trend, the economy is beginning to transition to post-recovery growth.”
The second half will be marked by a transition that will see “a combination of rolling recoveries in areas of the economy that have lagged, like small business activity and employment, and ongoing but slower growth in areas that have already recovered from or did not decline during the recession,” Pride added.
Americans certainly have plenty to spend. U.S. household wealth soared to a record $136.9 trillion at the end of March, according to a June report from the Federal Reserve.
The surging stock market drove the overall increase in wealth, adding $3.2 trillion to household assets in the first quarter, while record-setting home prices added another $1 trillion, according to the central bank’s quarterly report on household, business and government finances. Overall household wealth rose $5 trillion from the fourth quarter of 2020.
Meanwhile, companies are expected to post third-quarter earnings growth of 23 percent, according to Ameriprise Chief Market Strategist David Joy, with growth in the fourth quarter expected at 18%.
“For the full-year, earnings growth is expected to top 35 percent,” Joy says. “A similar pattern is expected to unfold in terms of economic growth. Second quarter GDP is forecast to be as high as 10 percent.”
One weak spot has been jobs, which are coming back but in an uneven manner. January saw 236,000 jobs added, February was nearly double that at 536,000, March a whopping 785,000, then April’s disappointing 278,000 and 559,000 in May. June’s number will be reported Friday.
Recent economic reports have suggested that the economy remains on good footing entering the second half of the year. A monthly survey of small businesses by Paychex-IHS Markit released Tuesday found “a notable uptick in small business jobs growth in June” with gains widespread by industry and geography.
Among sectors, personal and other services, along with finance, leisure and hospitality led the gains in percentage terms.
Tuesday also saw consumer confidence rise sharply in June, with the Conference Board’s monthly index rising to 127.3 from 120 a month ago. Consumers’ expectations that business conditions will improve in the next six months rose to 33% from 31.1% in May.
And Bankrate’s quarterly survey of economists released Wednesday was generally bullish, with experts predicting monthly job gains averaging 412,000 over the next 12 months.
The economists also believe the Fed will be slow to raise interest rates even as inflation has begun to run above the Fed’s 2% annual goal, putting more emphasis on the recovery in the job market than on rising prices, which it views as temporary.
“The Federal Reserve is monitoring the pace of hiring as one of the indicators of the strength of the economic recovery,” says Odeta Kushi, deputy chief economist at First American Financial Corporation, according to Bankrate. “While the labor market recovery is likely to pick up steam in the months to come, the economy has only recovered 66% of the jobs lost at the start of the pandemic.”