New government figures show that the U.S. economy expanded at a far slower pace in the second quarter than economists predicted, though real gross domestic product (GDP) surpassed its pre-pandemic high, cementing the V-shaped recovery.

Gross domestic product (GDP) rose at a 6.5 percent annualized rate last quarter, the Commerce Department said in a release Thursday. The number is an “advance” estimate and will be revised in a future update. At the same time, the Commerce Department revised its first-quarter GDP growth estimate from 6.4 percent down to 6.3 percent.

Robust consumer spending and business investment drove economic output higher in the second quarter, while a sharp decrease in private inventory investment—led by a drop in retail trade inventories—were a drag on output, the Commerce Department said.

Economists polled by Reuters had forecast GDP rising at an 8.5 percent rate last quarter, while a Dow Jones estimate predicted economic growth of 8.4 percent, making the Commerce Department’s figures a surprise to the downside.

Calling second-quarter growth “disappointing,” ING chief international economist James Knightley said in a note that the GDP number “means that the US economy has now recovered all of the lost pandemic output and marks another key milestone in the recovery.”

“The next target, given all the stimulus sloshing around, is to end the year with an economy larger in size than would have been the case had the pandemic not struck,” Knightley added.

While all three of the main Wall Street indexes climbed on opening bell on Thursday, the dollar index (DXY) responded with a downward slide.

While the second quarter likely marks the peak in growth this cycle, economists widely expect the economic expansion to remain solid for the remainder of the year. One of the risks to the economic outlook is a resurgence in COVID-19 infections, driven by the Delta variant, fueling fears of renewed lockdowns.

Higher inflation, if sustained, as well as ongoing supply chain disruptions could also prove to be a drag on growth going forward.

The Commerce Department’s GDP announcement included a note about inflation. The personal consumption expenditures (PCE) price index shot up by an annualized 6.4 percent in the second quarter relative to the first quarter. The so-called core PCE price index, which excludes the volatile categories of food and energy, increased by an annualized rate of 6.1 percent quarter-over-quarter.

The PCE price gauge is the Federal Reserve’s preferred inflation measure for calibrating monetary policy. The Fed’s target is around 2 percent, more than three times lower than the figure released by the Commerce Department.

On Friday, the Commerce Department is scheduled to release monthly PCE, which will show the extent of upward price pressure in June. The agency’s most recent release showed that the pace of inflation, as measured by the PCE gauge, hit a 13-year high of 3.9 percent in the 12 months ended in May, nearly double the Fed’s target.

While some economists have raised the alarm on inflation, Fed officials and members of the Biden administration have insisted that price rises are temporary, arguing that inflationary pressures will ease as pandemic-related supply chain disruptions are ironed out.

Fed Chair Jerome Powell told reporters on Wednesday that, while it’s possible inflation “could turn out to be higher and more persistent than we expected,” he believes prices are likely to recede once supply chain bottlenecks abate.

Powell reiterated his view that, in the next year or so, inflation will return closer to the central bank’s target of 2 percent.

The Fed on Wednesday kept its overnight benchmark interest rate near zero and left its massive asset purchase program unchanged.

Consensus estimates among economists are that the U.S. economy will grow by around 7 percent this year, which would be the strongest performance since 1984.

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