US GDP badly missed growth estimates in the 2nd quarter - but the economy is still bigger than it was before the COVID-19 recession

• US gross domestic product grew at an annualized rate of 6.5% in the second quarter of 2021.
• The jump missed the 8.5% growth estimate but placed GDP above its pre-crisis peak for the first time.
• While output has fully retraced its virus-fueled drop, the labor market remains far from fully healed.

US gross domestic product completely erased its pandemic-era decline in the second quarter of 2021 thanks to huge stimulus, vaccination, and swift reopening.

But production bottlenecks and supply shortages are keeping the economy from growing as fast as expected.

The country's economic output grew at an annualized rate of 6.5% during the three months that ended in June, the Commerce Department said Thursday. Economists surveyed by Bloomberg expected the economy to grow at a rate of 8.5% through the quarter.

The reading marks the second-strongest growth rate since 2003, exceeded only by the record-fast expansion seen in the third quarter of 2020. It also follows an annualized growth rate of 6.3% in the first quarter. It also brings US GDP above the previous peak seen in the fourth quarter of 2019. The achievement signifies that the economy is finally larger than it was just before the crisis began.

Bloomberg's liveblog covering the release noted that a big part of the surprisingly slow growth rate came from private inventories, or stock businesses are holding but haven't sold yet, which contributed a 1.13 percentage point drag on the headline growth figure. Economists had expected companies to be building up their stockpiles, rather than depleting them. There was also a modest drag from a decline in federal government spending as the big stimulus spending from the American Rescue Plan begins to fade.

Other components of GDP grew at a robust pace. Personal consumption expenditures, by far the largest part of the US economy, grew by a whopping 11.8% annualized rate last quarter. While investment in commercial buildings fell, investment in equipment and intellectual property both rose at rates far higher than their pre-pandemic trends.

Still, the gap between average estimates and the actual print will likely disappoint those hoping for a stronger pace of recovery.

Progress still to be made

The reading doesn't mean the entire economy has fully healed. While consumer spending and activity in certain sectors have rebounded, the labor market remains far from a complete recovery. The leisure and hospitality sector, for example, is still down more than 2 million payrolls compared to its pre-COVID peak.

The GDP print also represents how much the economy would've expanded had its second-quarter growth rate continued for a full year. And early signs point to growth moderating in the third quarter. For one, the US continued vaccinating its population at a healthy rate through the second quarter, resulting in much of the economy reopening through the period. With many lockdown measures already reversed, the rate of improvement in the current quarter will likely soften.

The quarter also benefitted from the $1.9 trillion stimulus package passing in March. The measure included a $300-per-week supplement to unemployment insurance and $1,400 direct payments, both of which helped retail sales surge to record highs in April.

The report comes as lawmakers inch forward with a new package set to boost economic growth. A bipartisan $1 trillion infrastructure plan advanced in the Senate on Wednesday after 17 Republicans joined Democrats in backing the measure. The proposal includes funding for roads, bridges, broadband access, and clean water projects.

President Joe Biden has pitched the plan as a way to improve economic growth over the long run, instead of a short-term boost like that fueled by Democrats' March stimulus. Such investments promise "a big return" for economic growth and should be paid for while interest rates sit at historic lows, Treasury Secretary Janet Yellen said in May.