Less Growth Now, More Growth Later

Less Growth Now, More Growth Later

July marked another month of gains for stock and bond investors. The MSCI All Country World Index, a global measure of the stock market, increased 0.7%, with U.S. large-cap stocks doing particularly well with a gain of 2.4%. Despite a decline of 3.6% this month, U.S. small-cap stocks haven’t lost their place as one of the best asset classes over the last 12 months, comparing favorably to U.S. large-cap stocks over that time. Fixed-income investors also joined in the party in July. The overall U.S. bond market added to last month’s gains and returned another 1.1%.

Economic progress in the U.S. also continued. Second quarter 2021 Gross Domestic Product data was released and indicated that our economy grew at an estimated 6.5% annualized rate. This growth in GDP was enough to increase the size of the U.S. economy to a new high, surpassing the pre-pandemic peak from early 2020. The eurozone’s economy grew at an even greater 8.3%, making it likely that the broader global economy has also surpassed its pre-pandemic levels.

A domestic growth rate of 6.5% is a very strong result. That level of growth is more than double the long-term average, and yet it was still well below recent forecasts of 9% to 10%. Explanations for the shortfall mainly focus on supply chain bottlenecks, which restricted supply from meeting demand, and the spread of the COVID-19 Delta variant. The Delta variant-related surge is a human tragedy in and of itself, but it will also keep the economic recovery from reaching its full potential. During the pandemic, women disproportionately carried the burden of looking after family (and school-age children in particular) when schools were forced to close. If the Delta variant proves difficult to control into the start of the school year with large numbers of children still ineligible for the vaccine, the same parents who elected to leave the work force before may not be inclined to rejoin it.

A silver lining to weaker-than-expected GDP data is that it likely extends the runway of above-average economic growth. Previously, the GDP growth rate was expected to follow the 9-10% near-term forecasts with a drop below four percent around the start of 2022. Slower economic growth now may postpone that drop, and lead to a longer (if milder) stretch of economic growth. The longer the economy has unsatisfied demand for goods and services, as well as corresponding unfilled job openings, the longer our GDP can continue to grow above the 2-3% rates we experienced in the years prior to the pandemic.

Though re-openings have stumbled, the economic recovery continues, and we hope you are able to stay safe and enjoy your summer. If there is anything we can do for you, please let us know.

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