United States economic outlook: first half of 2021

The growth in the first half of 2021, the fastest pace in 37 years, was sufficient to push the United States economy above its pre-pandemic level.

1. Federal stimulus spending – and vaccine distribution, which allowed more restrictions to be lifted – helped the United States economy expand at a better than 6% annualized rate in the first half of the year. The economy grew at an annualized rate of 6.6% in the second quarter, topping the first quarter’s 6.3%, sufficient to push the economy above its pre-pandemic level (chart 1).
   

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2. The pace of hiring slowed considerably in August. The 235,000 nonfarm employment gain was significantly below expectations and the 570,000 monthly average for the first half of the year. Details showed a clear impact from the resurgence of COVID-19 cases linked to the Delta variant.
   

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3. Despite the August deceleration in the labor market, many unemployed workers that were temporarily laid off have been rehired. In just over a year, the U.S. labor market has recovered more than 75% of the jobs lost since the start of the pandemic. This contrasts with the recovery from the Great Recession, when it took almost four years for the U.S. labor market to recover to this degree (chart 3).
   

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4. The quarterly trajectory of the core PCE index shows the strength of inflation in the first half of the year. It rose 6.1% in the second quarter, following an increase of 2.7% in the first (chart 4). Rising inflation, together with the resurgence of coronavirus cases, dented consumer confidence in August. However, inflationary pressures may ease as the boost from reopening the economy fades. The CPI rose 0.3% in August, a deceleration from the 0.5% gain in July and the 0.9% gain in June.
   

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5. The improved market liquidity created by the U.S. Federal Reserve in response to the COVID-19 pandemic encouraged portfolio managers to return to emerging markets. The resumption of private financial flows to Latin America and the Caribbean staved off the wave of debt defaults and restructuring that were anticipated in the wake of the pandemic. In the first half of 2021, total Latin American and Caribbean (LAC) bond issuance in international markets reached US$ 92 billion, the region’s highest half-yearly issuance ever recorded (chart 5).
   

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6. Amid the spread of the Delta variant, uncertainty around the economic impact of COVID-19 has risen once again. Looking ahead, fading fiscal support and uncertainty regarding when to remove monetary stimulus pose risks to the economy. Ultimately the pandemic, and how it will unfold in the coming months, remains the most unpredictable factor in the United States economic outlook.