US GDP grows less quickly than expected in Q2 as government stimulus expires

US economic growth accelerated less than expected in the second quarter, although it did reclaim its pre-pandemic level.

The US economy accelerated less than expected in the second quarter, although it did reclaim its pre-pandemic level.

According to the Department of Labor, gross domestic product expanded at a quarterly annualised pace of 6.5%, up from 6.3% in the first quarter but below the 8.5% clip economists were anticipating.

Household consumption continued to race ahead, surging by 11.8%, but residential investment and federal government non-defence spending dragged on GDP, falling by 9.8% and 10.4%, respectively.

The latter was the result of the end of the government's PPP programme.

Yet the biggest headwind was a $166.0bn plunge in inventories, which subtracted 1.1 percentage points from the rate of GDP growth, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said, labelling it a "big surprise".

Inflation on the other hand intensified with the price index for gross domestic purchases - the broadest measure of prices in the economy - jumping by 5.7%, up from 3.9% over the three months to March.

The price deflator for personal consumption expenditures meanwhile climbed at a pace of 6.4%, after increasing by 3.8% in the first quarter, and the core PCE price index by 6.1%, which was up from 2.7%.

Commenting on the latest data, Paul Ashworth, chief US economist at Capital Economics, highlighted downwards revisions to the personal savings rate which left it at 10.9% at quarter's end.

While still above 8.0%, where it was at before the pandemic, there was now less margin left for Americans to keep running it down and thus support the economy.

"Overall, more evidence that stimulus provided surprisingly little bang-for-its-buck, with the economy quickly pushing against unexpected supply constraints instead, which have driven inflation higher."

Shepherdson was more upbeat, predicting that GDP growth would surpass 8% in the third quarter as inventories rebounded.

He also noted that the "plunge" in inventories was hard to reconcile with the monthly data published by the Department of Commerce - "for reasons which are not clear".

"In short, then, we are not disappointed by the headline GDP growth miss," Shepherdson said.

"The overshoot to consensus in the GDP deflator is no big deal; the core PCE deflator was in line with expectations at 6.1%, and the other components are noisy."