The Bureau of Economic Analysis (BEA) said that second-quarter GDP increased at a 6.5% pace which fell short of expectations. Economists were forecasting an 8.4% increase. However, there's some optimism about Q3 and Q4 gross domestic product (GDP) as inventories grew less than expected which means that this should be a tailwind in coming quarters.

It's not surprising that both stocks and bonds rose following the report. The economy being softer than expected means that more there is more capacity for growth before the economy returns to pre-coronavirus trends in terms of employment and output. It also slightly reduces the urgency of the Federal Reserve to remove accommodation and decreases the odds of inflation sustaining at current levels.

Inside the Numbers

GDP is a measure of all goods and services did slightly accelerate to 6.5% from 6.3% in Q1. However, many economists were projecting growth somewhere between 8% and 9%. One major reason for the miss was a 3.5% decline in gross private domestic investment due to declines in private inventory and residential investment. Another factor was an increase in imports and a decline in government spending.

The parts of the economy which showed growth were, of course, consumer spending which increased by a staggering 11.8%. In fact, consumers accounted for 70% of economic activity. Other gainers were nonresidential fixed investment, exports, and state and local government spending.

Personal savings dropped sharply from $4.1 trillion to $2 trillion. This is an effect of stimulus payments last year, the lockdowns last year, the economy reopening, and the resulting pent-up demand.

Overall, the economy continues to make solid progress but still has much work to do. After the Great Recession, the economy never returned to its pre-crisis growth trend which meant there was lost output that was never recovered. While this is thought of as just numbers on a screen, it also is tangible in terms of jobs never created, families never formed, and life goals never accomplished.

Policymakers seem intent on not repeating the same mistake this time. This report shows that they are doing better than last time but still falling short.