July 29, 2021
The profit share of corporate income rose 1.6 percentage points in the first quarter, countering claims of squeezed employers.
The economy grew at a 6.5 percent annual rate in the second quarter. This put GDP 0.8 percent above its last pre-pandemic quarter but still leaves it roughly 2.2 percent below its pre-pandemic trend.
Productivity Growth Still Strong
While the growth for the quarter was somewhat lower than had generally been expected, it would still likely imply strong productivity growth for the quarter. With the increase in hours worked likely to come in near 4.0 percent, the GDP figure would imply productivity growth near 2.5 percent. This is lower than the 4.1 percent rate from the first quarter of 2020 to the first quarter of 2021 but far above the 1.0 percent annual rate in the decade preceding the pandemic. If this sort of uptick in productivity growth could be sustained, it makes it unlikely that inflation would be a problem in the years ahead.
Profit Share Rises Sharply in First Quarter
This release included revised data for 2019 and 2020, as well as the first quarter of 2021. While revisions are often large and can reverse the story in the unrevised data, the revisions still show that profit share of corporate income falling from 2015 to 2020, with the 2020 share being the lowest since 2009. The revised data show a sharp uptick in profit shares from the 2020 average of 23.9 percent to 25.5 percent in the first quarter of 2021.
The quarterly data are erratic and subject to large revisions, so the first-quarter data has to be viewed with caution. (The profit data for the second quarter will not be available until the preliminary GDP report is released in August.) However, a rise in profit shares is inconsistent with the story of employers being squeezed by rapidly rising wages resulting from a labor shortage.
Saving Rate is 10.9 Percent in Second Quarter, Up from 7.5 Percent Pre-Pandemic Average
The saving rate continued to be very high in the second quarter. This is worth noting because it is after most of the pandemic checks were already sent. If people are going to spend large portions of the savings accumulated during the pandemic, then we should be seeing saving rates well below the pre-pandemic average. At least through the second quarter, this does not seem to be the case, meaning that this source of potential inflationary pressure is not currently a problem.
Spending on Consumer Services Drives Quarter’s Growth
Spending on services was the major factor driving second quarter growth, rising at a 12.0 percent annual rate and adding 5.1 percentage points to the quarter’s growth. Restaurants were the biggest factor in this growth adding 2.2 percentage points to GDP. Spending on recreation services added 0.8 percentage points to growth. Spending on goods also rose rapidly with spending on durable goods rising at a 9.9 percent rate and spending on nondurables rising at a 12.6 percent rate. This spending added 0.9 percentage points and 1.8 percentage points to growth, respectively.
Even with the strong second-quarter growth, spending on consumer services was still 3.3 percent below the pre-pandemic level. By contrast, spending on durables (largely cars) was 28.6 percent higher, while spending on nondurables was 11.9 percent higher. It is likely that we will see weak growth in durable goods spending going forward, while services still have room for rapid growth.
Investment Remains Strong
Nonresidential investment grew at an 8.0 percent rate in the quarter. Equipment investment and investment in intellectual products both grew considerably more rapidly, rising at a 13.0 percent and 10.7 percent rate, respectively. Structure investment fell at a 7.0 percent rate. This likely reflects changing work and shopping patterns, as more people continue to work from home and shop online. Equipment investment is now 6.3 percent above the pre-pandemic level, while investment in intellectual products is 9.0 percent. Structure investment is 20.4 percent lower.
Residential Investment Falls at 9.8 Percent Rate
After three quarters of extraordinary double-digit growth, residential investment fell sharply in the quarter. This likely reflects shortages of building materials that are limiting construction in many areas. Residential investment is still up by 16.3 percent from pre-pandemic levels.
Core PCE Deflator Was Up 3.4 Percent Over the Last Year
We did see some uptick of inflation this quarter, with the core Personal Consumption Expenditure (PCE) deflator rising 3.4 percent. This is likely to prove transitory as the economy works through shortages in many sectors associated with its rapid reopening.
Prospects for Continued Strong Growth Look Good, with Mix Shifting
This report is again overwhelmingly positive. We are likely to continue to have very strong growth, at least through the rest of 2021; although the mix will be very different. Consumer services will continue to grow rapidly, especially if the pandemic can be controlled. Spending on cars and other consumer durables is likely to weaken, as people who bought cars during the pandemic are not likely to buy another one this year or next. However, there will be some backlog demand, as suppliers rush to make-up shortages in this quarter. There will be a similar story with housing, where we are likely to see construction move back close to first quarter levels.
There will also be a lot of demand restocking inventories. Declining accumulations subtracted 1.1 percentage points from this quarter’s growth after reducing the first quarter’s growth by 2.6 percentage points.
Inflation is a concern, but with strong productivity growth, and a shift in income shares from wages to profits, it seems like it will be a transitory issue.
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