The U.S. economy continues to rebound as economic activity measured by gross domestic product (GDP) grew at an annual rate of 6.5% in the second quarter, up from 6.3% in the first quarter of 2021.
The size of the economy is now greater than the level it was at when the pandemic started in 2020.
Second quarter growth came from fiscal stimulus and accompanying consumer spending, which expanded at an annual rate of nearly 12%.
Inflation Worries
Normally, accelerated growth would be viewed by investors as positive and attract more capital.
However, investor sentiment is dampened by the recent outbreak of the Delta coronavirus variant, as well as elevated inflation readings.
Over the short term, in my opinion the heightened attention to more pandemic restrictions on business will be a focus. In addition, the inflation question is one which poses a more severe threat for the economic environment.
Service Sector
In terms of the US economy, the improvement in the service areas and dramatic increase in travel demand clearly have helped the airline, hotel, and entertainment- based sectors.
In my view, there are a few different cross currents which make the economic picture complex.
With heightened demand comes the continuing pressure on supply chains for inputs across a wide variety of industries.
Supply Chains
In many cases, there are long wait times for goods, especially from overseas suppliers dealing with logistical problems in their own countries.
In the United States, many industries are faced with labor shortages as the number of available jobs is far exceeded by people who don’t want to participate in the labor force.
Some of this will change based on the planned reopening of schools in September, along with companies who are making workers return to offices.
In my opinion, the elimination of unemployment benefits in about 70% of the working population areas will be a factor as well.
Corporate Earnings
On the corporate front, earnings reports continue to exceed estimates and with borrowing rates exceedingly cheap.
As the last month of summer begins, continued attention will be paid to profit outlooks, the Federal Reserve’s statements at its annual meeting in Jackson Hole, Wyoming, and inflation.
Other topics of focus must include monetary policy and tapering, the ballooning national debt, and the expanding fiscal deficits.
In my opinion, with equity valuations fully priced in the technology sector and the market heavily weighted towards the tech giants, capital rotation into other areas would be a welcome development.
Photo Credit: Colin Knowles via Flickr Creative Commons
Disclosure
This piece is provided as educational information only and is not intended to provide investment or other advice. This material is not to be construed as a recommendation or solicitation to buy or sell any security, financial product, instrument, or to participate in any particular trading strategy.
