The US economy grew a bit faster than initially thought in the second quarter, lifting the level of gross domestic product above its pre-pandemic peak, as massive fiscal stimulus and the impact of COVID-19 vaccinations boosted spending.
The report from the Commerce Department on Thursday also showed a hefty increase in corporate profits, which should allow businesses to continue buying equipment and hiring workers, and keep the economy on a solid growth path in the third quarter even as soaring coronavirus cases cool consumer spending.
Gross domestic product increased at a 6.6% annualized rate, the government said in its second estimate of GDP growth for the April-June period. That was revised up from the 6.5% pace of expansion reported in July.
Economists polled by Reuters had expected that second-quarter GDP growth would be raised to a 6.7% pace.
The economy grew at a 6.3% rate in the first quarter, and has recouped the steep losses suffered during the two-month COVID-19 recession. The level of GDP is now 0.8% higher than it was at its peak in the fourth quarter of 2019.
The upward revisions to last quarter's GDP growth reflected a slightly more robust pace of consumer spending than initially estimated. The government disbursed one-time stimulus checks to some middle- and low-income households during the quarter.
The Federal Reserve has maintained its ultra easy monetary policy stance, keeping interest rates at historically low levels and boosting stock market prices.
Consumer spending, which accounts for more than two-thirds of the US economy, also got a lift from vaccinations, which fueled demand for services like air travel, hotel accommodation, dining out as well as entertainment.
Growth in consumer spending was raised to an 11.9% rate from the previously reported 11.8% pace. But momentum appears to have slowed early in the third quarter amid a resurgence of COVID-19 infections driven by the Delta variant of the coronavirus.
Persistent bottlenecks in the supply chain are also causing shortages of goods like motor vehicles and some household appliances, hurting retail sales. Credit card data suggests spending on services like airfares, cruises as well as hotels and motels has been slowing.
"This is a speed bump due to the interaction of Delta and supply-side constraints," said Michelle Meyer, chief US economist at Bank of America Securities in New York. "We still believe the foundation for the economy is solid and all signs point to strong underlying demand."
US stocks opened largely lower. The dollar (.DXY) rose against a basket of currencies. US Treasury prices were mostly lower.
The moderation in consumer spending is likely to be offset by strong business investment in equipment, which logged a fourth straight quarter of double-digit growth.
National after-tax profits without inventory valuation and capital consumption adjustments, conceptually most similar to S&P 500 profits, increased at a $303.6 billion rate, or 12.8% pace, in the second quarter, up from the 9.4% pace notched in the January-March period. Profits were up 69.3% from a year ago.
When measured from the income side, the US economy grew at a 1.6% rate in the second quarter after expanding at a 6.3% pace in the first quarter. The moderate rise in gross domestic income reflected an increase in subsidies, which are a subtraction in the calculation of GDI.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 4.0% pace after rising at a 6.3% rate in the first three months of the year.
Bank of America Securities slashed its GDP growth estimate for the third quarter to a 4.5% pace from a 7.0% rate. Economists at Goldman Sachs last week cut their growth estimate for this quarter to a 5.5% rate from a 9% pace.
Growth is expected to pick up in the fourth quarter, in part driven by businesses replenishing inventories, which were drawn down in the first half of the year to meet the strong demand. Overall, economists expect growth of around 7% this year, which would be the strongest performance since 1984.
Though the boost from fiscal stimulus is waning, consumer spending remains underpinned by a strengthening labor market.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 353,000 for the week ended Aug. 21.
Economists had forecast 350,000 applications for the latest week. Adjusting the data for seasonal fluctuations is tricky around this time of the year, a task that has been complicated by the pandemic. That could account for the increase in applications last week. Unadjusted claims dropped 11,699 to 297,765 last week.
Companies are clinging to their workers amid a labor shortage. Lack of childcare facilities and fears of contracting the virus have been blamed for worker shortages, which are partly contributing to employment remaining 5.7 million jobs below its peak in February 2020. There were a record 10.1 million job openings as of the end of June.
At least 25 states led by Republican governors have pulled out of federal government-funded unemployment programs, including a $300 weekly payment, which businesses claimed were encouraging unemployed Americans to stay at home.
There is, however, no evidence that the early termination of federal benefits has led to an increase in hiring in these states. The government-funded benefits will expire on Sept. 6.
"The persistence of the pandemic, exacerbated by the proliferation of the Delta variant, could delay the expected recovery," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "On the upside, quicker-than-expected approvals of booster shots for the general population ... would allow parents to get back to work sooner."