Key Takeaways:

  • Total GDP stands at $19.4 trillion — the highest level since before the pandemic;
  • Slower consumer spending and retail sales over the summer suggest a lower GDP for Q3;
  • The services portion of goods and services, which had grown to 70% just prior to the pandemic, now stands at 65% due to downturn in usage of hotels, restaurants, medical services and the like.

By Manuel Gutierrez, Consulting Economist to NKBA

 

Gross Domestic Product grew by 6.7% in the second quarter of this year, slightly better than first quarter’s gains of 6.3%. The latest quarter’s growth brings total GDP to $19.4 trillion in real terms. This marks the first time total output has surpassed pre-pandemic highs.

It has taken six quarters to exceed the prior peak. However, were it not for the economic recession resulting from the pandemic, it’s estimated that total GDP today would be over $19.9 trillion, or more than $500 billion above the actual Q2 total.

This projection is based on a continuation of the pace of growth seen from 2017 to 2019. Average growth over that three-year period was 2.5% annually.

GDP growth data for the third quarter won’t be available until the end of the month, but the slower pace of consumer spending seen during July and August, combined with slower retail sales in those two months compared to the previous quarter, suggest lower growth for GDP this quarter.

Nevertheless, consumer spending was positive in August, up by 0.4%, following a 0.5% drop in July. Despite August’s gain, consumer spending growth throughout this year has been disappointing, with an average 0.8% spending increase per month since January. As the chart in Figure 2 indicates, it has been a yo-yo pattern.

The second quarter of 2021 was the first time in six quarters that total GDP output has surpassed pre-pandemic levels.

However, this is lower than the 2.1% monthly average seen following the economic rebound from May 2020 to year-end.

The resurgence of the Delta variant of COVID-19, combined with higher inflation rates and consumer expectations for the inflation trend to continue, has led to increased pessimism.

Historically since the late 1950s, when consumer spending data by type was first available, the pattern has moved away from goods in favor of services.

Figure 3 shows that in the earlier period, over half of consumer spending involved the purchase of goods. Since then, spending for goods has been on a secular decline, with only slightly over 30% of total spending in February 2020 devoted to goods. Conversely, a larger and larger proportion of consumer spending has been on services, as it grew from about 45% in the late 1950s, to 70% by early 2020. As the chart indicates, however, spending for services has fallen to roughly 65% this year.

The recent reversal away from services spending of course is a direct result of the pandemic. Many businesses that deliver services, such as restaurants, hotels or health/medical facilities, have actually closed their doors or reduced their hours. At the same time, many consumers are staying away from these establishments, still wary of human contact.

The question remains whether, as the threat of the pandemic recedes, consumers will return to their old spending habits for services.

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