U.S. economy surpasses prepandemic size with 6.5% Q2 growth

Consumer spending, the main engine of the U.S. economic growth, was strong last quarter. It grew at an 11.8% annual pace. Although the rate of growth in goods spending was 11.6%, it was down from the 27.4% increase seen in quarter one. Spending on services, including restaurant meals and airline tickets, increased at a 12% pace, an increase of 3.9% in the January-March period. This is because more Americans are now willing to travel, shop, and eat out.The economy will grow by 7% in 2021. This would mark the strongest year-to-year growth since 1984. It would be a marked reversal of last year's 3.4% economic contraction, which was the worst in 74-years due to the pandemic.The possibility of a resurgent coronavirus, the highly contagious Delta variant, is a concern that is overshadowing all the positive economic forecasts. Now, the U.S. has more than 60,000 new confirmed cases per day, compared to 12,000 a month earlier. A surge in viral infections could cause consumers to pull back and slow down their spending.The economy continues to show sustained strength for now. America's employers added 850,000 new jobs last month, which was well above the average for the three previous months. The average hourly wage rose by 3.6% in comparison to a year ago, which is faster than the annual rate before the pandemic.Gus Faucher (chief economist at PNC Financial), said that the fundamentals of consumers and businesses remain very strong. He said he has not seen any effects from an increase in confirmed viral cases.Consumer confidence is at its highest since March 2020's pandemic. This is a key reason why sales are stable as Americans shift spending to services, from airline travel and restaurant meals to entertainment and shopping sprees. Orders for manufactured goods are a sign of solid corporate investment.The federal rescue money has contributed trillions to the recovery. This includes everything from stimulus checks to expanded unemployment benefits, small business aid, and just-distributed child credit payments. Millions of wealthy households have seen a huge increase in their wealth due to stock market and home equity gains.Federal Reserve is providing substantial support to the economy. The Fed reiterated Wednesday that it will keep its key short term interest rate at an all-time low of near zero in order to maintain low borrowing costs. To encourage borrowing and spending, the Fed will continue to purchase government-backed bonds.In fact, the recovery has been so quick, with consumers' pent-up demand driving growth after a year in lockdowns. The only risk is an inflation spike that could become out of control. The sharpest price rise in 13 years, and the fourth consecutive month of large price increases, was recorded in June as consumer prices rose 5.4% compared to a year earlier.Economists warn that if the Fed does not withdraw its extraordinary support of the economy, it may respond too late and too aggressively against high inflation by rapidly raising rates and possibly causing another recession.Jerome Powell, Fed Chair, stated Wednesday that inflation readings recently reflect price increases in a small range of categories such as used cars and airline tickets. He also said that temporary supply shortages resulting from the rapid reopening of the economy have distorted recent inflation readings. These shortages include items such as furniture, clothes, and computer chips.The rise in viral cases in Asia's transportation ports has caused some manufacturing plants in Asia to close down, further magnifying the supply bottlenecks. These bottlenecks could then continue to block the flow of goods to American retailers.Restaurants, retailers, and other service-industry employers have had to work harder to fill the jobs of consumers who are increasing their wages. Despite steady job market gains, 5.9% unemployment is still significantly higher than the 3.5% rate before the pandemic. The economy still has 6.8 million fewer jobs than it did before the pandemic.The economy will likely lose its current rapid pace of growth if it experiences severe shortages.