Economic growth has likely peaked for this cycle on a year-over-year basis, with GDP expected to grow at an over 12% pace once second-quarter data is released. In addition, April 2020 was officially declared the last month of the economic recession, making it the shortest downturn on record at two months. Last but not least, U.S. economic output in the second quarter as measured by GDP is almost sure to exceed the pre-Covid peak. While the rate of change in economic growth should slow, Bloomberg consensus GDP growth estimates remain at robust levels at 6.6% in 2021 and 4.1% in 2022.
The good news is that consumer inflation (CPI) hopefully reached its year-over-year peak in the second quarter as well. June CPI readings were 5.4% year-over-year, but at least some of that increase is attributable to Covid-impacts and other transitory factors. For example, May car rental prices were almost 88% higher year-over-year, which will ease as these companies increase their fleets. Inflation remains elevated, though around a 3% annualized rate is a good approximation for underlying inflation in our view (Chart 2). There are good reasons to believe that inflation does not get out of control. Two strong arguments are the disinflationary impulse of technology and the recent increase in productivity, with second-quarter GDP expected to exceed the prior peak. At the same time, jobs are still almost seven million lower than the pre-pandemic peak (Chart 3).