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How Is the Economy Doing? Here’s What Banks Say – The Wall Street Journal

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Citigroup said its second-quarter profit soared thanks to an increasingly bright view of consumer health.

Citigroup said its second-quarter profit soared thanks to an increasingly bright view of consumer health.

Photo: David Paul Morris/Bloomberg News

Here’s what the biggest U.S. banks are telling us about the state of the economy. 

Consumer spending is returning to pre-pandemic levels, and borrowing appears poised to rise. Markets are cooling, but deal making is as hot as ever. Still, the recovery remains vulnerable, bank executives said. Covid-19 variants are driving up case counts, raising the specter of new lockdowns. Government-aid programs that kept many Americans afloat are about to expire. 

People Are Spending but Not Borrowing–Yet

Americans are spending again, even more than they were pre-pandemic—booking trips and paying for restaurant meals with their credit cards. Flush with cash from government stimulus programs, they are paying down their card debt faster than they are spending.

That could change as supply-chain bottlenecks ease for cars, refrigerators and other big-ticket items. “The pump is primed” for more borrowing, said
JPMorgan
Chase & Co. CEO

Jamie Dimon.


“What we’re seeing are people starting to spend and act in a way that seems more like the way it was before the pandemic started.”


— Mike Santomassimo, Wells Fargo CFO

The Housing Market Is on Fire

The housing market remained red hot, with buyers bidding up the prices of second homes and suburban mansions.
Wells Fargo & Co.
and JPMorgan extended more mortgages than in the first quarter, which was already a blockbuster stretch for home lending.

But many are being priced out of the market, raising questions about growth. “We’ve seen so much home price appreciation that maybe affordability starts to be a little bit of a headwind,” said JPMorgan Chief Financial Officer

Jeremy Barnum.

CEOs Are Doing Deals

Corporations are spending, too. Deal making fees surged at the banks from a year before, reaching an all-time high at JPMorgan. And executives across the Street said more deals are in the works, indicating that CEOs are optimistic about the economy’s trajectory.
Goldman Sachs Group Inc.
, for example, said its backlog of investment-banking transactions ended the quarter at a record level.


“I think there’s a general sense of optimism. One never wants to jinx these things, but we really have a fabulous pipeline.”


— Jane Fraser, Citigroup CEO

Markets Are Busy–But for How Long?

Calmer markets dampened trading revenue, particularly in fixed income. But markets are still busier than they were pre-pandemic. Executives aren’t sure how long that will last.


31%: decline in total trading revenue at Goldman, JPMorgan and Citigroup

“We believe that this summer represents the acid test for whether normalized trading levels will be higher than pre-pandemic,” Goldman analysts wrote before the banks reported earnings.

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The U.S. Economy’s Prospects Looked Bright, Until the Delta Variant Surged – The Wall Street Journal

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Business reopenings, vaccinations and government pandemic aid this spring fueled gains in consumer spending.

Business reopenings, vaccinations and government pandemic aid this spring fueled gains in consumer spending.

Photo: Spencer Platt/Getty Images

The U.S. economy grew rapidly in the second quarter and exceeded its pre-pandemic size, but the outlook has suddenly turned cloudier due to the fast-spreading Delta coronavirus variant.

Virus cases are rising again, particularly in parts of the country where vaccination rates remain low. The Centers for Disease Control and Prevention this week recommended that vaccinated people resume masking indoors in places with high or substantial transmission of coronavirus, leading some local governments and businesses to reinstate restrictions on activity.

Apple Inc.,
for instance, said it would require workers and customers to wear masks in more than half of its retail stores, and Google delayed its return-to-the-office plans until mid-October. Several private and public employers have said they would require workers to be vaccinated or regularly tested for infection.

All of this has raised uncertainty about whether consumers and workers will retreat again, as they did last year. For now, forecasters generally don’t expect the spread of Delta to make a major dent in the U.S. economy, in part because businesses and consumers have learned to adapt to each wave of the pandemic.

Still, the Delta variant’s fast spread, initially in many emerging nations abroad, shows the U.S. economy remains vulnerable as long as the pandemic persists.

Shortages of available workers could restrain economic growth starting later this year. A San Rafael, Calif., boxing gym sought workers in early July.

Shortages of available workers could restrain economic growth starting later this year. A San Rafael, Calif., boxing gym sought workers in early July.

Photo: Justin Sullivan/Getty Images

“What you worry about is how many disruptions are we going to continually have to deal with?” said

Diane Swonk,
chief economist at Grant Thornton. “In the U.S. economy, there is some downside risk that some people don’t go out and don’t go out to eat as much as they did, they don’t travel as much.”

Gross domestic product, the broadest measure of U.S. goods and services produced, grew at a 6.5% annual rate in the second quarter, up slightly from a 6.3% growth rate in the first three months of the year, the Commerce Department said Thursday. The reading was below economists’ estimates but pushed the size of the economy above its pre-pandemic level, a milestone that underscores the speed of the recovery that began in May 2020.

The strong spring growth was fueled by trillions of dollars in fiscal stimulus and consumer spending that jumped at an 11.8% annual rate as more people received vaccinations and businesses reopened. U.S. payrolls continued to grow during the quarter, expanding the labor market by an average of nearly 600,000 a month. More recently, initial jobless claims last week resumed their decline.

Economists see two main ways the spread of the Delta variant could derail the robust recovery. First, some state and local governments could reimpose restrictions on businesses. Second, consumers could curtail spending on travel, dining out and moviegoing out of heightened cautiousness.

So far, new restrictions have been limited in scope, but the list is growing. They include the reinstatement of indoor-mask rules in some localities such as Los Angeles County.
Walt Disney Co.
said it will require visitors to Walt Disney World in Orlando, Fla., and Disneyland Resort in Anaheim, Calif., to wear masks indoors, effective Friday. Three music clubs in New Orleans—including Tipitinas—said they would require people attending shows to provide proof of vaccination or a negative Covid-19 test for entry, also effective Friday.

Americans don’t appear to be retreating into their homes as the Delta variant spreads. Flight volumes and hotel-occupancy rates continue to rise, according to an analysis by Jefferies. Public-transit usage is also gaining ground, though it is down compared with pre-pandemic levels, Jefferies said.

The increasing level of vaccinations in the U.S. has made people more likely to keep working and spending money despite the rise in cases.

“I really don’t expect anything like we saw in the spring of last year,” said

Ben Herzon,
executive director at forecasting firm
IHS Markit.
“Going forward we’ll just see how high the case count gets and how nervous some people get.”

Rising inflation, continued supply-chain disruptions and a shortage of available workers also are factors that could restrain the economy.

Budweiser brewer
Anheuser-Busch InBev SA
said it was grappling with how to mitigate a range of higher costs to protect profitability, though its sales reached pre-pandemic levels in the second quarter. It said barley and freight had gotten more expensive, and that greater demand for cans in the U.S. had forced it to import them from elsewhere, further adding to its costs.

Shipping bottlenecks and commodities costs are helping drive inflation in the U.S. WSJ visits a patio-furniture factory in China to see why refurbishing your backyard could be pricier this year. Photo: Patrick Fok

The Wall Street Journal Interactive Edition

Similarly, Nescafe coffee maker
Nestlé SA
warned that costs for transportation, commodities and packaging were all rising, with little indication as to when the current bout of inflation would end.

Elsewhere, logjams at seaports around the world have left toy companies such as
Hasbro Inc.
and
Mattel Inc.
scrambling already to ensure they will have sufficient supplies for the holiday shopping season. Toy-industry veterans say this year’s disruption is worse than when Covid-19 first struck last year, temporarily shutting many ports, factories and stores. Ocean freight bottlenecks have led to long delays for shipping from China and rates that are far higher than usual. Toy makers are also grappling with rising costs for materials and labor, leading some to raise prices.

Still, many analysts expect these supply constraints and bottlenecks to ease. Demand—particularly for long-lasting goods that consumers snatched up earlier in the pandemic—is starting to moderate. As a result, firms have more time to work through order backlogs and increase production. Many economists say inventory replenishment should boost output in the coming quarters.

A strong comeback in consumer demand this spring has been a double-edged sword for many businesses. Sales have boomed, allowing companies to recover losses, but growth has been so rapid, some have found it difficult to keep pace.

When many people got vaccinated earlier this year, they started flooding into Factory Hair Seattle to get their hair cut, said

Denise Rivera,
the salon’s owner. “It just exploded,” she said. “I’ve been through a recession and seen the economy come back, but never anything like this.”

As business soared, some stylists became mentally fatigued, and some said they couldn’t take any more clients. Ms. Rivera added two stylists to her staff of six to try to keep up with the onslaught of customers.

The salon also raised prices, in part to slow growth a bit to a more manageable level, said Ms. Rivera. Haircuts, which include a shampoo and a blowout, cost an average of $60 to $70, up by $5 from a year ago, she said.

Consumer prices rose 5.4% in June from a year before, the fastest pace since 2008, the Labor Department reported. As overall economic growth eases, price increases could cool as well. Economists surveyed by The Wall Street Journal in July see inflation measured by the department’s consumer-price index easing later this year, to 4.1% in December from a year earlier, and 2.5% by the end of 2022.

Overall, economists expect growth to remain strong, barring a sharp re-emergence of virus cases and related restrictions and fear. Respondents to the WSJ survey forecast the economy to grow 7% in the third quarter before drifting down to a 3.3% rate in the second quarter of 2022.

When the pandemic hit, sales at flatware maker Sherrill Manufacturing Inc. began doubling.

“The restaurants all shut down, so people were cooking for themselves, many of whom had never cooked anything beyond mac and cheese,” said

Greg Owens,
Sherrill’s chief executive. “They wanted something nicer on their table.”

Sales have continued to grow solidly but have cooled from the red-hot pace logged throughout much of the pandemic. Mr. Owens said the spending boost from government stimulus money has faded, and people are shifting their spending toward services such as restaurants amid reopenings.

“That has certainly created less of a demand for people sitting at home going, ‘Our plates are kind of old and I don’t really like them,’ or ‘Our flatware is dated,’” he said.

Still, Mr. Owens expects sales to remain strong. His company manufactures flatware in the U.S, and he said many individuals are increasingly interested in buying American-made products because of the limited availability of many imported goods during the pandemic.

At Factory Hair Seattle, business just recently started to level off, though the salon remains busy. The salon is seeing an influx of men coming in to tidy up—but still maintain—their longer pandemic hair, Ms. Rivera said.

“They’re like, ‘I’m still not going to be going back into my office until September, October,’ ” she said. “They don’t want to go back to this short, high-and-tight corporate look.”

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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US economy surpasses pre-pandemic size with 6.5% Q2 growth – Associated Press

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WASHINGTON (AP) — Fueled by vaccinations and government aid, the U.S. economy grew at a solid 6.5% annual rate last quarter in another sign that the nation has achieved a sustained recovery from the pandemic recession. The total size of the economy has now surpassed its pre-pandemic level.

Thursday’s report from the Commerce Department estimated that the nation’s gross domestic product — its total output of goods and services — accelerated in the April-June quarter from an already robust 6.3% annual growth rate in the first quarter of the year.

The latest figure fell well below the 8%-plus annual growth rate that many economists had predicted for the second quarter. But the miss was due mainly to clogged supply chains related to the rapid reopening of the economy. Those bottlenecks exerted a larger-than-expected drag on companies’ efforts to restock their shelves. The resulting slowdown in inventory rebuilding, in fact, subtracted 1.1 percentage points from last quarter’s annual growth.

By contrast, consumer spending — the main fuel of the U.S. economy — surged for a second straight quarter, advancing at an 11.8% annual rate. Spending on goods grew at an 11.6% rate, and spending on services, from restaurant meals to airline tickets, expanded at a 12% pace as vaccinations encouraged more Americans to shop, travel and eat out.

Companies, too, spent with confidence last quarter. Business investment surged at an 8% annual rate in the April-June quarter, adding 1.1 percentage point to GDP.

With consumers and businesses expected to keep spending, many analysts expect the economy to grow at a robust pace of around 6.5% for all of 2021, despite the supply shortages and the possibility of a resurgent coronavirus in the form of the highly contagious delta variant. That would amount to the strongest calendar-year growth since 1984.

Growth that strong would far exceed the 2% to 3% average annual rates of recent decades. And it would represent a striking bounce-back from the economy’s 3.4% contraction last year in the midst of the pandemic, the worst decline since the 1940s.

Underpinning the rapid recovery have been trillions in federal rescue money, ranging from stimulus checks to expanded unemployment benefits to small business aid to just-distributed child tax credit payments. And millions of affluent households have benefited from a vast increase in their wealth resulting from surging home equity and stock market gains.

“Consumers are going to continue to drive the economic train,” said Mark Zandi, chief economist at Moody’s Analytics. “There is a lot of excess savings, a lot of cash in people’s checking accounts.”

Jen Psaki, the White House press secretary, hailed the GDP report and called on Congress to go further by passing the administration’s proposals to vastly expand the nation’s infrastructure.

Overhanging the bright economic forecasts is the threat posed by the delta variant. The U.S. is now averaging more than 60,000 confirmed new cases a day, up from only about 12,000 a month ago. Should a surge in viral infections cause many consumers to hunker down again and pull back on spending, it would weaken the recovery.

For now, the economy is showing sustained strength. Last month, America’s employers added 850,000 jobs, well above the average of the previous three months. And average hourly pay rose a solid 3.6% compared with a year earlier, faster than the pre-pandemic annual pace.

Consumer confidence has reached its highest level since the pandemic struck in March 2020, a key reason why retail sales remain solid as Americans shift their spending back to services — from restaurant meals and airline trips to entertainment events and shopping sprees.

The economy is also receiving substantial support from the Federal Reserve. On Wednesday, the Fed reaffirmed that it will maintain its key short-term interest rate at a record low near zero to keep short-term borrowing costs low. It will also continue to buy government-backed bonds to put downward pressure on long-term loan rates to encourage borrowing and spending.

The recovery, in fact, has been so rapid, with pent-up demand from consumers driving growth after a year of lockdowns, that one looming risk is a potential spike in inflation that could get out of control. Consumer prices jumped 5.4% in June from a year ago, the sharpest spike in 13 years and the fourth straight month of sizable price jumps.

The measure of consumer inflation in the second-quarter GDP report showed an annual rise of 3.4% for core inflation, which excludes food and energy. It was the fastest such jump since 1991.

In addition to the drag on GDP from weak inventory restocking, reflecting the supply chain problems, housing construction fell at a 9.8% annual rate last quarter. This decline reflected, in part, the troubles home builders have had in obtaining lumber and other supplies.

Some economists have warned that by choosing not to begin withdrawing its extraordinary support for the economy, the Fed may end up responding too late and too aggressively to high inflation by quickly jacking up rates and perhaps causing another recession.

But at a news conference Wednesday, Fed Chair Jerome Powell underscored his belief that recent inflation readings reflect price spikes in a narrow range of categories — from used cars and airline tickets to hotel rooms and auto rentals — that have been distorted by temporary supply shortages related to the economy’s swift reopening. Those shortages involve items like furniture, appliances, clothing and computer chips, among others.

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U.S. Economy Grew 1.6% in Second Quarter – The New York Times

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Gross domestic product grew 1.6 percent in the second quarter, the latest gauge of a rebound that could be challenged by the Delta variant of the coronavirus.




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$20

trilion

4th qtr. 2019 level

+1.6%

from

previous

quarter

15

Gross domestic product

Adjusted for inflation and

seasonality, at annual rates

10

5

’15

’16

’17

’18

’19

’20

’21

$20

trilion

4th qtr. 2019 level

+1.6%

from

previous

quarter

15

Gross domestic product

Adjusted for inflation and

seasonality, at annual rates

10

5

0

’15

’16

’17

’18

’19

’20

’21


Source: Bureau of Economic Analysis

By Karl Russell

Vaccinations and federal aid helped lift the U.S. economy out of its pandemic-induced hole in the spring. The next test will be whether that momentum can continue as coronavirus cases rise, masks return and government help wanes.

Gross domestic product, the broadest measure of economic output, grew 1.6 percent in the second quarter of the year, the Commerce Department said Thursday, up from 1.5 percent in the first three months of the year. On an annualized basis, second-quarter growth was 6.5 percent.

Fueled by strong consumer spending and robust business investment, the growth brought output back to its prepandemic level, adjusted for inflation. That is a remarkable achievement, exactly a year after the economy’s worst quarterly contraction on record. After the last recession ended in 2009, the G.D.P. took two years to rebound fully.

G.D.P. rebounded much faster than it did in the Great Recession




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+

15

%

2001

Cumulative percentage change

in G.D.P. from the start of the

last five recessions

1980

1990

+

10

+

5

2007

0

2020

5

10

5

quarters since

recessions began

10

15

20

+

15

%

2001

1980

Cumulative percent change in G.D.P.

from the start of the last five recessions

1990

+

10

+

5

2007

0

2020

5

10

5

quarters since

recessions began

10

15

20


Note: Gross domestic product is adjusted for inflation and seasonality. Recessions are labeled by the years they started.

Source: Bureau of Economic Analysis

By Karl Russell

But the recovery is far from complete. Output is significantly below where it would be had growth continued on its prepandemic path, and other economic measures remain deeply depressed, particularly for certain groups. The United States has nearly seven million fewer jobs than before the pandemic. The unemployment rate for Black workers in June was 9.2 percent.

“The good news is, this is all occurring much more rapidly than after the financial crisis,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “The bad news is, the pain was much worse.”

For Sarah Ladley, the economy’s spring reawakening was a glimmer of hope after a brutal year for her business.

Ms. Ladley, 33, started selling banana-based frozen treats out of her Denver food truck nearly a decade ago, just after she graduated from college. The pandemic nearly wiped her out: She made it through last year with the help of a loan through the Paycheck Protection Program, but the business lost money. With pandemic restrictions still in place early this year, she began looking for another job to pay the bills.

Instead, the phone began ringing with people looking to hold events.

“All of a sudden in May, it was like the floodgates opened,” she said.

Now Ms. Ladley has a different set of problems. Business has rebounded, though not all the way, and she is having trouble fulfilling demand. She had to change the cups she uses after a vendor ran out, stores will sometimes be out of the fruit she needs and she has struggled to hire workers amid competition from businesses that can offer higher pay and year-round employment. She says she has had to turn away business to avoid burning out her limited staff.

“Things definitely aren’t normal, but even if they were normal, I wouldn’t be able to handle it,” she said.

Indeed, the economy’s second-quarter growth might have been stronger had it not been for supply-chain disruptions and labor challenges that made it difficult for many businesses to keep their shelves stocked and their stores staffed. Inventories fell and imports rose as companies turned to overseas suppliers and their own warehouses to meet demand where domestic producers could not. And despite a red-hot housing market, residential construction fell 2.5 percent in the second quarter as builders struggled to get materials and workers.

Those issues, combined with a rush of consumer demand, contributed to faster inflation in the second quarter. Consumer prices rose 1.6 percent from the first quarter of the year to the second. Without adjusting for inflation, economic output rose 3.1 percent.

Now a new threat is emerging in the highly contagious Delta variant of the coronavirus, which has led to a surge in cases in much of the country. The Centers for Disease Control and Prevention recommended this week that even vaccinated people should wear masks indoors in some parts of the country, and some mayors and governors have reimposed mask mandates.

Few economists expect a return to widespread business shutdowns or stay-at-home orders. But if the resurgent virus leads to renewed caution among consumers — a reluctance to dine at restaurants, hesitation about booking a late-summer getaway — that could weaken the recovery at a crucial moment.

“The reason that is concerning is that this burst of activity around reopening has been driving the economy the past couple months,” said Michelle Meyer, head of U.S. economics at Bank of America. “Even a modest change in behavior could show up more meaningfully this time around.”

Brandon Lindley is watching the Delta variant news with mounting concern. He and his husband, Raphael Polito, own retail stores in California and Arizona selling designer flip-flops and other tourism-oriented products. After a disastrous 2020, business has picked up in California this year, but they are grappling with supply-chain and labor issues, and their store in Scottsdale, Ariz., is still struggling. Business has softened since July 4, which Mr. Lindley suspects could reflect concern over the new variant.

“Everyone’s a little on edge,” he said. “They don’t know what’s coming down the pipeline.”

There is little evidence so far that either the Delta variant or inflation are making a dent in consumer demand overall. Consumer spending rose 2.8 percent in the second quarter, and more recent data from private-sector sources has yet to show a significant slowdown.

Spending on services was particularly robust in the second quarter as widespread vaccinations and falling coronavirus cases led Americans to return to restaurants, nail salons and other in-person activities. But goods spending remained strong as well, reflecting the strong financial position of many households after successive rounds of government aid, said Aneta Markowska, chief financial economist for Jefferies, an investment bank.

Personal income after taxes fell from the first quarter, when stimulus payments provided a temporary lift, but is still 6.4 percent above its prepandemic level after adjusting for inflation. And Americans are collectively sitting on trillions more in savings than they had before the pandemic.

“The story of the last two decades was that every time you got a price increase somewhere, it caused immediate demand destruction because household incomes and balance sheets were so constrained,” Ms. Markowska said. “Today that’s not the case. Household finances are in the best shape they’ve been in decades.”

Still, the recovery has been highly unequal. Data from Affinity Solutions, which tracks the credit and debit card transactions of 90 million U.S. consumers, shows that recent increases in spending have been driven by high-income households. Employment among people with a college degree — many of whom could work from home — fell less in the pandemic and has already returned to its previous level, while employment among those with a high school diploma or less remains millions of jobs below that benchmark.

“The people who were working and did not have an interruption in their pay were able to save more money and now have this pent-up demand,” said Kristen Broady, a Dillard University economist and a fellow at the Brookings Institution. For low-income households who fell behind on rent or bills during the pandemic, she said, “their situation is even worse than it was before.”

And this time, workers and businesses may have to face the pandemic without much help from the federal government. Roughly half the states have cut off enhanced unemployment benefits in recent weeks, and the programs are set to end nationally in September. The Paycheck Protection Program, which helped thousands of small businesses weather the crisis, is winding down. A federal eviction moratorium is scheduled to end this week. And there is no sign that Congress intends to pass a fourth round of direct checks to households.

Nela Richardson, chief economist for ADP, the payroll processing firm, said the second quarter might stand as a high-water mark for the recovery, when federal aid was still flowing and when vaccinations and the lifting of restrictions gave people an opportunity to spend.

“All the winds were going in one direction, which was to push the economy forward,” she said. “The more interesting question is: Where do we go from here?”

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