US growth and inflation disappoint raising fears about stagflation

by Shaun Richards

Yesterday brought news that left markets if not shaken perhaps a little stirred. It came from the Bureau of Economic Analysis as it gave its first estimates for the second quarter of this year.

Real gross domestic product (GDP) increased at an annual rate of 6.5 percent in the second quarter of 2021 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 6.3 percent (revised).

So it has grown by around 1.5% as we would express it in each quarter of 2021 so far which in isolation is pretty impressive. Also internationally it is a good performance. This is how the Peterson Institute reviewed it.

Prior to the passage of the American Rescue plan, some of the major economic forecasters expected the US economy to grow between 3.4 and 4.2 percent in the four quarters of 2021. The new advance estimate from the Bureau of Economic Analysis shows that the economy grew 3.1 percent in just the first two quarters (an annualized rate of 6.4 percent). This is over 90 percent of the growth that the Organization for Economic Cooperation and Development (OECD) or the Survey of Professional Forecasters (SPF) expected for the entire year and is 3/4 or more of what other forecasters expected in just half of the time they expected it to get there.

There was a very bullish kicker to this.

and may even exceed forecasts from prior to the pandemic, as fiscal and monetary support are on track to more than offset the negative impact of the pandemic on aggregate economic activity.

On the other side of the coin were those who had seen things were going well and raised their expectations. Here is CNBC pointing out that they ended up disappointed.

GDP rose at a 6.5% annualized pace in the second quarter, according to the Commerce Department’s first estimate Thursday.

That was well below the Dow Jones estimate of 8.4%.

Initial claims for unemployment insurance also missed expectations, with the 400,000 total above the 380,000 expectation.

So adding in the weekly unemployment numbers things were not as good as forecast. The swing element looks to have been inventories which fell by the equivalent of 2.62% of GDP in the first quarter and then by 1.13% in the second. So there was no bounce back and instead a further fall which looks to have been driven by the auto industry because of the chip shortage.

But against that the US economy has now recovered its pre pandemic peak and has nudged slightly ahead.

Inflation Everywhere

The GDP report brought this.

The price index for gross domestic purchases increased 5.7 percent in the second quarter, compared
with an increase of 3.9 percent (revised) in the first quarter.

So quite a pick-up and it also brought this.

 The PCE price index increased 6.4
percent, compared with an increase of 3.8 percent(revised). Excluding food and energy prices, the PCE
price index increased 6.1 percent, compared with an increase of 2.7 percent(revised).

This matters because it is the index that the US Federal Reserve targets and as you can see was both high and rising.

This lunchtime brought the June update and it provided little relief.

The PCE price index increased 0.5 percent. Excluding food and energy, the PCE price index increased 0.4 percent…..

If we switch to the monthly increases we have seen 0.3%, in February and then 0.6% twice and now 0.5% twice. So four months in a row of pretty stable but high inflation. Or in annual terms.

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The PCE price index for June increased 4.0 percent from one year ago, reflecting increases in both goods and services. Energy prices increased 24.2 percent while food prices increased 0.9 percent. Excluding food and energy, the PCE price index for June increased 3.5 percent from one year ago.

Goods inflation is at 5.2% and services 3.3%

The Federal Reserve

We find ourselves mulling not only “transitory” but also “moderately”

the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.

This is how Chair Powell put it in the press conference.

Inflation has increased notably and will likely remain elevated in coming months before moderating. As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly because supply bottlenecks in some sectors have limited how quickly production can respond in the near term. These bottleneck effects have been larger than anticipated, but as these transitory supply effects abate, inflation is expected to drop back toward our longer run goal.

So after being wrong is he persisting with what is a type of trust me line. Then in response to a question from the Financial Times representative he deployed another weapon.

Sure. I’d be glad to. So if you look again, if you look at the most recent inflation report, what you see is that it came in significantly higher than expected. But essentially all of the overshoot can be tied to a handful of categories.

That is to pick up a couple of categories and blame them. Notice how they do not do the same for ones which are not moving or if they fall.

 It’s new, used and rental cars. It’s airplane tickets, it’s hotels and it’s a couple of other things. And each of those has a story attached to it that is really about the reopening of the economy. So we look at that and we think that those are temporary things because the supply side will respond, the economy will adapt. We have a very adaptable, flexible economy and labor market, and it’s a real asset that we have.

The problem will really hit the fan though id this happens.

It isn’t the kind of inflation that’s spread broadly across the economy.


We keep getting rumours of the end of the stimulus but we keep going forwards without it happening. Chair Powell and the US Federal Reserve in fact eased policy by doing this.

The Federal Open Market Committee on Wednesday announced the establishment of two standing repurchase agreement (repo) facilities—a domestic standing repo facility (SRF) and a repo facility for foreign and international monetary authorities (FIMA repo facility). These facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.

This afternoon has seem James Bullard trying to push things the other way.

WASHINGTON (Reuters) – The Federal Reserve should start reducing its $120 billion in monthly bond purchases this fall and cut them “fairly rapidly” so the program ends in the first months of 2022 and paves the way for a rate increase that year if needed, St. Louis Federal Reserve president James Bullard said on Monday.

They mean Friday and he backed this up with a different perspective on inflation.

Fed’s Bullard: Quite Bit Of Inflation Right Now, Expected To Moderate But Could Continue Through 2022……Fed’s Bullard: Major Inflationary Impulse Has Surprised Us All

Er not us all.

Should there be any further slowdown in growth we will find ourselves in a type of stagflation. I do not see them tapering or raising interest-rates into that so we will remain in the ever decreasing circles which began over a decade ago. At least the US has regained the previous high for real GDP.


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