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Not Good Enough

07/30/2021

Sometimes, good news is not good enough!  That was the case with yesterday’s release of second quarter GDP growth, which was a whopping 6.5%.  That’s the highest in 35 years.

The good news is that it improved from a very robust 6.3% during the first quarter.  Despite a 3.4% drop in GDP last year, we are now fully recovered and even 0.8% ahead of GDP in the fourth quarter of 2019.  (Of course, we’re dealing with inflated numbers now, and the actual output is still 2.5% below 2019.)

Here’s the bad news – economists were expecting a 7% growth rate, not 6.5%.

Here’s the problem – the supply chain is worse than we thought.

Consumers are flush with cash, mostly from deferring spending during the pandemic, as well as government relief programs.  When consumers buy things, inventory goes down.  To rebuild inventory, companies have to place new orders.  The value of those new orders is part of the GDP computation.  However, sellers could not fill those orders, because of supply chain issues, and the sales are not made.

Problems in the supply chain are self-correcting and need minimal government involvement.  But, it does add to inflationary pressures.  As the supply chain self-corrects, that inflationary pressure decreases.  In addition, low inventory levels are a strong source of new orders in the future, which provides continuing “legs” to the recovery.

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