The U.S. economy continues to chug along at a faster pace amid improving mobility and state reopenings across most parts of the country (see table). While the pace of COVID-19 vaccinations has slowed considerably, falling to just 0.5 million in early July from a 3.4 million high in April, recent real-time data indicates households are more confident the pandemic is behind them. With people stepping outdoors and spreading their wings, signs are emerging that the consumption basket is moving to services from durable goods. But while people are less worried about another wave of the virus, despite news that the delta variant has reached the U.S., concerns now focus on the impact of higher prices on pocketbooks.

While the base effects from the pandemic are fading from annual price inflation (as the impact from pandemic-depressed prices filters out of the system), the large seasonally adjusted month-over-month inflation prints for the past three periods point to a hefty near-term boost in prices across many sectors, driven by supply and labor bottlenecks catching up to the reopening's demand surge. Our real-time pricing data is mixed: Gasoline prices have increased to their highest since October 2014 as the economy strengthens and after OPEC and its oil-producing allies failed to reach an agreement on production activity for August and beyond, and metal prices have increased to multiyear highs on a faster recovery and promising infrastructure news. But lumber prices saw their largest monthly drop since 1978 in June, on a pickup in production and easing housing demand.

Meanwhile, as the U.S. economy gradually shifted to service consumption in the second quarter of 2021, demand for housing and housing-related items slowed. Both residential investment and durable goods consumption--the main contributors to the growth of the economy last year during quarantine--have eased, as indicated by our real-time and traditional economic trackers. The growth slowdown in spending on goods, however, was likely more than offset by a sharp pickup in spending on services, on the back of a strong reopening in June. Real GDP likely reached its pre-pandemic peak in the second quarter (the first estimate will be out at the end of July).

While the delta variant (or any other variant, for that matter) is a downside risk to our growth forecast in the near term, we continue to expect U.S. real GDP will climb onto its pre-pandemic growth path in the third quarter this year, with stronger service consumption and cooler but more sustainable durable goods consumption and residential investment (see "Economic Outlook U.S. Q3 2021: Sun, Sun, Sun, Here It Comes," June 24, 2021). Our forecasts of real GDP growth for 2021 and 2022 are now 6.7% and 3.7%, respectively, up from 6.5% and 3.1% in our December report, with our 2021 GDP forecast (and now the Federal Reserve's) targeting the highest reading since 1984.

Unvaccinated Not Convinced

In June, the pace of new vaccinations in the U.S. once again ranked lower than that in major European counterparts and Canada. The share of the population with at least one shot was 55% as of July 3, slightly above 51% last month but ranking near the bottom of major developed countries. With daily doses administered falling to 0.5 million in early July from 3.4 million in the middle of April, according to the Centers for Disease Control and Prevention, the U.S. is now near the bottom, whereas it once led the pack (see chart 1).

Some of this is surely due to the July 4 holiday weekend, but it also seems increasingly hard to convince many unvaccinated folks to get their shots. That said, 47% of the American population is fully vaccinated, up by 5 percentage points from last month and still in second place among major developed countries, right after the U.K.

Chart 1

Chart 2

The slowdown in vaccinations and the more infectious delta variant add risk to the reopening. Although the U.S. reopening is currently not in imminent danger, the path of COVID-19 is hard to track. The World Health Organization describes the delta variant as having "increased transmissibility." Indeed, even for Israel, where 60% of the population is fully vaccinated, new cases have resurged because of the delta variant (see chart 2).

Fortunately, preliminary results from recent lab tests reportedly found vaccinated people do seem protected against the delta variant as well as experience fewer hospitalizations. As of July 8, we haven't seen the number of new cases picking up in the U.S. as a whole, but some states with higher proportions of unvaccinated people are starting to see a rise in cases. While our baseline view maintains a strong recovery of consumer-facing service sectors even with the delta variant spreading in the U.S., we can't ignore the risk that this could change over the near term.

Hotel Occupancy Reaches Pre-Pandemic Level While Mobility Remains Slightly Below

Despite news that the delta variant has landed on U.S. shores, people are stepping out and socializing with family and friends (see charts 3-7). As Americans grew more comfortable with outdoor activities and even trips, the service sector recovery continued in June and early July. Hotel occupancy rates exceeded the pre-pandemic level for the first time since the COVID-19 outbreak in the middle of June, at 69.6% as of June 26, higher than the 2019 average of 66.1%. Air traffic is also getting busier. Checkpoint numbers have increased since February, now at only 16% below the 2019 average. Similarly, Google mobility trends remained only 4% short of the pre-pandemic level in June through early July.

All major cities trended up to varying degrees. The number of seated diners was just 2.45% below the pre-pandemic level in early July, jumping from 10% below in the previous month. Accommodation and food service spending has been at its pre-pandemic level since the middle of May.

Chart 3

Chart 4

Chart 5

Chart 6

Chart 7

Housing Market Cools

As people head outdoors and home prices climb higher, demand for new homes has softened despite historically low mortgage rates. The Mortgage Bankers Assn. Mortgage Application Purchase Index has been falling at a steady pace since March this year. As of the week ended July 2, the index had fallen to 250.6, a level similar to that in February 2020 (see chart 8).

The fall in the purchase index indicates housing might have ceased to be the main engine of economic growth in the second quarter this year, consistent with our June baseline forecast that residential investment would fall by 6% at an annualized rate in the second quarter. Surging home loan amounts, together with skyrocketing home prices caused by an inventory shortage, have discouraged homebuyers in recent months. As home demand and home renovations retreat from the elevated levels last year while sawmill production improves, lumber future prices fell to $757/1,000 board feet in early July--less than half the prices seen in the middle of May (see chart 9).

Chart 8

Chart 9

Manufacturers Busy And Prices High

Lingering effects of previous home purchases and the $2.5 trillion "excess savings" accumulated by households will likely keep goods demand strong, albeit with a weaker growth impulse in the second half of the year. In June, consumer confidence stayed on the improving trend seen since January, with the Conference Board Consumer Confidence Index going up by 7.3 to 127.3 in June, a level last seen at the end of 2019 (see chart 10). The more government-transfer-sensitive low-income family spending jumped in April after the third round of stimulus checks and remained about 20% above the January 2020 level from April to June, signaling resilient demand (see chart 11).

Chart 10

Chart 11

Upbeat consumers have kept manufacturers busy. Raw steel capacity utilization has stayed above the 2019 average since the end of May, at 83 as of the week ended July 2 (see chart 12). Intermodal railroad traffic carrying goods is also back to the pre-pandemic normal (see chart 13). Meanwhile, production of (refined) gasoline has rebounded to pre-pandemic levels, but upstream crude oil production continues to underperform despite West Texas Intermediate crude oil prices moving up past $70 per barrel (see chart 14).

Chart 12

Chart 13

Chart 14

And the summer season, coupled with pent-up travel demand, has also brought about higher gasoline prices (see chart 15). Industrial metal future prices also stayed elevated, with the CMCI Industrial Metal Price Index hovering around $1,430 per point from May to early July, 30% higher than the 2019 average (see chart 16).

However, a semiconductor shortage has forced auto manufacturers to cut production capacity in the face of strong demand. Consumers have faced higher car prices in both new and used car auto segments throughout this year, with the Manheim Used Vehicle Value Index now at 200.4 (in June), 44% higher than its 2019 average. That said, the Manheim index had its first decline last month--albeit a small one--and the industrial price index seems to have stopped increasing, probably in an early indication of constraints on production finally easing.

Chart 15

Chart 16

More Jobs And More Service Jobs

The economy has created more jobs since the week of June 12, which the June jobs report from the Bureau of Labor Statistics (BLS) doesn't reflect (by survey design), but household pulse employment data does (see chart 17). Indeed job posting numbers are on a steady rise, increasing to 33.6% above the February 2020 level as of June 25 and up by 7.6 percentage points from last month (see chart 18). Initial jobless claims fell to 370,000 in the past two weeks, only 170,000 away from the pre-pandemic average (see chart 19). In line with these findings, the BLS reported job openings held at a record 9.2 million in May. Continuing claims also dropped to the lowest since the pandemic began, although the pace of declining slowed in the first half of 2021 (see chart 20).

Chart 17

Chart 18

Chart 19

Chart 20

New jobs are likely to come mainly from the service sector. Out of the 662,000 new private nonfarm jobs added in June, 642,000 came from the service sector, among which 343,000 came from leisure and hospitality, according to BLS figures. That means over 95% of new private nonfarm jobs in the second quarter came from the service sector. The rotation of household spending from goods consumption and housing to services is also evident in the job market data. And when all is said and done, we hope that the movie theaters will also make a strong comeback from the pandemic hit to the chin (see chart 21).

Chart 21