The US economic recovery will start slowing in the 3rd quarter as inflation and shortages drag on growth, BofA says

• The pace of the US recovery will slow after peaking in the second quarter, Bank of America said.
• The bank's economists revised their GDP estimates higher to 7% growth in 2021 and 5.5% in 2022.
• Supply shortages and soaring inflation will cut into buying activity and contribute to the slowdown, they said.

The US economic rebound reached its peak this quarter. From July onward, the story of nationwide recovery will be one of moderation, Bank of America said Friday.

The combination of March stimulus, successful vaccine distribution, and swift reopening accelerated the US recovery to an all-out sprint. The economy is on track to grow the most since 1984 this year and, in the process, fully recoup gross domestic product lost during the pandemic. After more than a year in lockdown, the US is poised to end the year

Yet the breakneck rate of recovery will start to slow in a matter of weeks, economists led by Michelle Meyer said in a note to clients. The bank sees growth slowing after reaching 11% in the second quarter. GDP will expand at a 9% rate in the third quarter and slow further to a 5% rate in the fourth quarter, BofA said.

The pace of expansion at the end of the year is "far from shabby" but "will feel like a marked slowing from the current rapid pace," the team added.

The bank also revised its yearly US GDP forecasts higher to reflect extraordinary growth through the start of the year. The economists see GDP expanding 7% in 2021, beating the 6% global forecast. The estimate compares to a November 2020 forecast calling for 4.5% growth. Output is expected to grow 5.5% in 2022, up from the prior estimate of 3%.

BofA's first estimate for growth in 2023 came in at 2.2%. While the figure lags the global projection of 3.7% growth, the broader measure is somewhat skewed by emerging markets catching up with the US's speedy recovery.

Surging inflation and supply bottlenecks slow the boom

While the coronavirus and its economic fallout are expected to fade throughout the year, new challenges are already curbing US growth.

For one, two sectors that saw sales boom through the pandemic are on the brink of slowing. The US housing and auto markets drove spending on durable goods roughly 30% above their pre-pandemic high, but soaring demand has since locked horns with strained supply.

The imbalance has driven prices much higher in both markets, and Americans are already pulling back on their buying plans. Home sales slowed through the spring, and vehicle sales will likely follow as inflation accelerates, the economists said.

It's not just durable goods facing dire shortages. Bottlenecks across key supply chains have powered supply strains throughout the economy, hitting products ranging from semiconductors to ketchup. The shortages have contributed to the strongest rates of inflation since 2008. Higher prices are discouraging purchases, and by the time supply catches up, demand will likely be softer, the bank said.

A drop in goods sales will be somewhat offset by rebounding services spending, but that dynamic "will take the next several quarters to play out" as the economy comes back online, the team added.

Supply-demand mismatches also weighed on the labor market's recovery. Hiring slowed sharply in April despite job openings hitting a record high and millions of Americans still out of work. Virus fears, childcare costs, and enhanced unemployment insurance likely kept supply "slow to respond" to business demand, the economists said. Those effects will likely fade by the fall as UI expires and schools reopen, they added.