The U.S. economy grew at a strong pace in the spring as the country emerged from the darkest days of the coronavirus pandemic. The question now is what happens next, especially as the delta variant continues to spread.
On Thursday morning, the Commerce Department reported gross domestic product grew 6.5% in the period between April and June from a year earlier as the rollout of vaccines spurred a surge in economic activity.
Although that was below forecasts of around 8% growth, it still marked the second-strongest period of growth since 2003, or after a 33.4% annualized surge in the July-September period of last year, when the pandemic led to intense volatility in the economy.
The second quarter's growth was also faster than the revised 6.3% growth registered in January-March.
"Consumer spending was very strong in the second quarter," says Jay Bryson, the chief economist at Wells Fargo. "In general, you're looking at very, very strong growth."
Compared against the previous quarter, the economy grew 1.6% in April-June.
But GDP data is backward looking, and many analysts expect growth to have marked a peak. For the second half of the year, the pace of growth will likely slow down, even as it is likely to remain strong.
The question is how much the economy could slow. Here are four factors that could determine the path forward:
The delta variant and the here-we-go-again impact
The pandemic is clearly not over yet. The highly transmissible delta variant of the coronavirus is fueling a surge in cases around the U.S., and multiple municipalities have reinstated indoor mask mandates, including Los Angeles County and St. Louis.
The Centers for Disease Control and Prevention this week revised its guidance to recommend that some fully vaccinated people wear masks indoors if they live in areas with substantial or high transmission.
Although few people expect the type of economic impact we saw when the pandemic started last year, it remains a real concern, given that only about half of the U.S. population is fully vaccinated.
Some small-business owners and their employees are worried about a repeat of last year, when many were forced to shut down their stores.
Ethnie Grazette, who works at Duman Home in Brooklyn, N.Y., says the spread of the virus could upend what has been a few very good months for the shop, which sells bedding and towels.
"These last few months have been pretty good," Grazette says, smiling. "I got a lot of customers coming in. They're spending money. It's good for me and the people to get out."
"I'm worried about what might happen," she adds, however, remembering the anxiety and uncertainty during the first part of the pandemic. "If this new variant makes us shut down again, it's going to put a lot of strain on the economy
High inflation: temporary or here to stay?
Another risk is inflation. Data this month showed consumer prices surged 5.4% in June from a year earlier, the highest increase in nearly 13 years.
On Wednesday, after the Federal Reserve's two-day meeting, Chair Jerome Powell again maintained that these increases are a result of pandemic disruptions to the economy and will be short-lived or "transitory."
Others are not so sure. Some economists worry that inflation could prove harder to reverse if Americans and businesses start to expect that prices will be high — and act accordingly.
Stores could raise prices, and consumers could stop buying certain things, for example.
Even if it proves temporary, high inflation is already weighing on businesses and their customers.
"Just because it is transitory — that is, caused by some dislocation of the pandemic — that does not mean it is not disruptive and extremely impactful to certain segments of the economy," says Constance Hunter, the chief economist at KPMG.
The big debate over workers in America
Perhaps no issue has split opinions more sharply than why some Americans have remained reluctant to return to work, hindering some sectors like leisure and hospitality.
Republicans have consistently blamed the enhanced unemployment benefits passed during the pandemic. They say the benefits are a disincentive to work, and about half of states — almost all led by Republican governors — are ending the benefits early.
The data so far has been inconclusive, and analysts cite a number of reasons that some Americans have stayed on the sidelines, including health concerns, difficulty finding child care and, yes, the financial cushion provided by expanded benefits.
Ralph Elia owns KC Arts in Brooklyn, and he says it has gotten harder for him to find workers.
"I feel like small business has been in competition to get employees with the benefits," Elia says. "I agreed with it in the beginning. We really needed it. But at some point, they should have slowed it down or cut it off. Because we need to hire people. People need to get out and work."
Chips and the supply chain chaos
It's a problem that has bedeviled industries from carmakers to homebuilders since last year: A surge in demand from people cooped up at home has led to shortages of key materials, such as chips used in all kinds of electronics and cars, as suppliers struggle to keep up.
Though some of the supply chain constraints are starting to ease — in the lumber sector, for example — there's no certainty of when global trade will approach normality.
So far the impact has been manageable overall, though much depends on how long the shortages of key materials last.
"If there will be any drag on growth in the second quarter, it could be from inventory," says Bryson, of Wells Fargo. "[There are] lots of supply constraints, businesses can't produce as much and so, because of that, they may have been selling out of their inventory, and that could be a mild headwind to growth."
STEVE INSKEEP, HOST:
If you are among the Americans who resumed eating out or traveling or attending ball games this spring, you may be part of the reason the United States economy grew sharply in the second quarter. It grew at a pace of 6.5%. So what does that number mean? Let's go to NPR's newly named business correspondent David Gura. David, good morning.
DAVID GURA, BYLINE: Thank you, Steve.
INSKEEP: So what does that number mean?
GURA: Well, first of all, it is a big number. Economists expected it would be around 8%, but this is the second-fastest period of growth since 2003. The fastest one was at the end of last summer, during a period of intense volatility in the middle of the pandemic when growth surged by 33%. One thing to keep in mind is GDP is backwards-looking. It's a snapshot of a moment in time. And in this case, as you said, it's a picture of growth at a crucial period in the economic recovery when it felt like the worst of the pandemic was behind us. That 6.5% number reflects businesses opening up - people going out to eat again, going to movies, going to concerts, traveling. And also, Steve, according to the report, government support - including expanded unemployment benefits.
INSKEEP: Which, of course, are now drying up. What was it like for businesses as customers did return?
GURA: Yeah, I spent some time this week talking to workers, talking to small business owners, and one of them is Ethnie Grazette. She works at a store in Brooklyn that sells bedding and towels. She's very glad to be back at work behind the cash register. That shop closed for a few months last year. And I asked her how she's feeling about business and about where things go from here. And Grazette told me the last few months have been pretty good.
ETHNIE GRAZETTE: I got a lot of customers coming in, just spending money. So it's good for me and for the people to get out and, you know, do a little bit of shopping. They still shop online, but I appreciate them coming in.
GURA: You know, I also talked to some economists, and they told me they expect growth will continue to be strong going forward this year. But they say the second quarter, these past few months, this was probably the high watermark, and growth is going to start slowing as the year goes on. They also said there are some risk factors that threaten the economic recovery.
INSKEEP: Such as what?
GURA: Well, the delta variant chief among them. It is a big concern. Economists told me they're watching the spread of this new variant closely, but they're not adjusting their forecasts for growth, at least not yet. They were pretty clear this isn't going to be deja vu. For one thing, half the U.S. population now is vaccinated against COVID-19, and they don't think we'll see shutdowns again. But there is a chance, Steve, new variants could change spending habits. It could cause some people to postpone trips they'd planned to take. They might decide to avoid crowded places, like stores and restaurants.
After a two-day meeting of the Fed Reserve wrapped up this week, Fed Chair Jerome Powell was asked how new strains of COVID-19 could affect the economy, and here's what he had to say.
(SOUNDBITE OF ARCHIVED RECORDING)
JEROME POWELL: With successive waves of COVID over the past year and some months now, there has tended to be less economic - less in the way of economic implications from each wave.
GURA: So Powell there sounding kind of optimistic, but of course, who knows what's going to happen here. The Fed also saying the path of the economic recovery continues to depend on the course of the virus.
INSKEEP: Just got time for a sentence here. Is there another risk factor you want to mention?
GURA: Yeah, inflation's still a big one, prices continuing to creep up. The Fed chairman reiterated his belief that those price increases are going to be transitory as he put it, but the concern is, if they continue to go up in a sustained way, Steve, the Fed could raise interest rates sooner. Right now the projections for that start happening in 2023.
INSKEEP: NPR's David Gura. Thanks.
GURA: Thank you. Transcript provided by NPR, Copyright NPR.