3 great things about the American economy in the GDP report - and one bad thing

• The US economy grew at a 6.5% annual rate in the second quarter, below economists' expectations of 8.5%.
• Most of the drag came from a surprising decrease in inventories. In other words, firms didn't have enough stuff to sell.
• Consumer spending and business investment are still going strong, suggesting a robust recovery.

The American economy grew at a 6.5% annualized rate in the second quarter, a headline number that disappointed many and fell below economists' expectations of 8.5% growth in April, May, and June.

Even with that disappointment, real GDP surpassed its previous high from before the pandemic struck, in the final quarter of 2019, and it's still the fastest quarterly growth rate in the last 18 years, except for the massive rebound last summer after the initial pandemic-driven economic collapse in the spring.

Looking at the details from the GDP report released Thursday morning underscores how the economy could be stronger than the surprise miss suggests. There is that one key weakness that caused the miss, though: inventories.

Americans are shopping again

Consumers make up by far the biggest part of the US economy. Americans spending money on goods and services accounted for 69% of current-dollar GDP between April and June.

And consumer spending is roaring back as the economy reopens. Real personal consumption expenditures grew 11.8% on an annual basis in Q2, vastly higher than the average growth rate of around 2.6% between 2017 and 2019.

Looking at nominal, or non-inflation-adjusted, numbers, you can see the rapid acceleration in consumer spending over the last few quarters, now well above pre-pandemic highs:

Americans are going out again

Some of the standout subsets of consumer spending reflect the "hot vax summer" of Americans going back out into the world. Inflation-adjusted spending on recreational services was up 42.9% on an annual basis, and food service and accommodations was up an astonishing 67.7%. That increase for restaurants and hotels accounted for roughly a third of the total GDP growth rate in the quarter.

A look at the total non-inflation-adjusted levels on restaurant and hotel spending shows that this category is growing even faster than consumption overall, showing how one of the sectors hardest hit by the pandemic and lockdowns is very quickly rebounding:

Overall, consumer demand has been booming, and that should support an ongoing strong recovery.

Businesses are investing, and it should lead to more productivity

Another standout from the GDP report came from business investment in equipment and intellectual property. Real spending on equipment grew 13.0% on an annual basis, or about three times faster than the average 3.9% rate between 2017 and 2019.

Similarly, investment in intellectual property rose at a 10.7% annual rate, above the pre-pandemic trend of 7.1%.

Business investment is important because it both signals that companies are expecting more demand in coming months and are tooling up to meet that demand, and because those kinds of purchases of equipment and technology can support increased productivity for workers, which should lead to faster growth and higher wages.

However, inventories unexpectedly shrank

The big surprise in the GDP report that contributed to the miss in the headline growth figure came from changes in inventories.

When companies build up stockpiles of goods, it's recorded as an add to GDP, and when they sell more than they replenish, it causes a drag. In the second quarter, contracting inventories unexpectedly subtracted about 1.1 percentage points from total GDP growth.

However, that shouldn't be a huge problem going forward. Pantheon Macroeconomics' chief economist, Ian Sheperdson, wrote in a note following the GDP report that they "expect a big rebound in Q3 inventories - the Q2 numbers could be revised up too," and still expect strong growth through the rest of the summer.

It's not the only surprising economic data that the Biden administration has run into amid reopening, though, so the road to recovery will likely be anything but straightforward, as strong as the economy is.