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Illustration: Rebecca Zisser/Axios

The second half of the year starts Thursday and from an economic perspective, it looks to be a lumpy but uphill climb.

Why it matters: The shape of the economic recovery will be defined by how the labor market grows, how spending drives inflation and how the Federal Reserve signals its plan to phase out crisis-era policies.

By the numbers: After declining 3.5% in 2020, the U.S. economy is expected to grow 6.5% in 2021, according to FactSet.

  • Q2 estimates for GDP growth peak at a 10% rate before cooling down for the second half.

Labor recovery: Labor supply constraints should loosen after federal unemployment supplements expire in September and schools reopen, JPMorgan economists write in a recent research note.

  • The unemployment rate is expected to drop from 5.8% now to 5.3% by the end of the year, according to FactSet.
  • Wage growth is expected to continue as employers compete for labor to meet demand. In March, the reservation wage (the lowest wage that a worker would be willing to accept for a new job) grew 15.7% year over year.
  • Labor force participation should also improve as virus fears wane with vaccine distribution, child care problems recede as schools reopen, and the general reflection on work-life priorities settles down as people transition.

Inflation watch: Core PCE inflation may have peaked, but will likely remain above 2% for the remainder of the year.

  • Inflation will be bolstered by spending. Morgan Stanley estimates $1 trillion in excess cash now sits with the bottom 90% income group — households that in the aggregate are more likely to spend liquid assets compared to higher-income families.
  • Supply-driven price increases in categories like cars and lumber are likely temporary whereas rent price growth is more persistent because of cyclical pricing pressure, Morgan Stanley also notes.

Fed tapering is coming. With employment on the mend and inflation running above the Fed’s 2% target rate, the central bank is expected to start reducing its purchases of mortgage securities and Treasury debt.

  • Most economists expect a taper announcement by the end of the year.

Threat level: A new COVID variant remains a top concern.

  • When asked how ready the U.S. and global economies are to sustain future variant-related closures, Charles Schwab’s chief investment strategist Liz Ann Sonders tells Axios she expects shutdowns to be much more targeted and treatment options to be better with more access to vaccines.

The bottom line: "The recovery always came down to whether there would be enough stimulus to sustain us through the shutdowns," Capital Group U.S. economist Darrell Spence notes in a recent memo.

  • "[W]ith the vaccine rollout compressing the time between stimulus and the functional end of COVID, we could see even stronger growth than the market expects today."

Go deeper

Kate Marino, author of Markets
Oct 5, 2021 - Economy & Business

What's behind the rising energy prices

Illustration: Sarah Grillo/Axios

Energy prices are climbing around the world amid a perfect storm of extreme weather, rising power demand, and supply constraints. It’s roiling markets overseas, with China and India facing electricity crises while a dozen power companies in the U.K. have gone belly-up.

Driving the news: Oil prices jumped again Monday after OPEC decided not to boost production beyond the modest increase that it had previously outlined.

2 mins ago - World

Ukraine president to Biden: "There are no minor incursions"

Photo: Doug Mills-Pool/Getty Images

Ukrainian President Volodymyr Zelensky responded on Thursday to President Biden's suggestion that a "minor incursion" by Russia may not draw the same response as a large invasion, which some in Kyiv saw as inviting Russian aggression.

What he's saying: "We want to remind the great powers that there are no minor incursions and small nations. Just as there are no minor casualties and little grief from the loss of loved ones. I say this as the President of a great power," Zelensky tweeted.

13 mins ago - Health

The drugs pushing prescription prices down for Medicare patients

Illustration: Annelise Capossela/Axios

Although net prices of brand-name drugs have increased significantly over the last decade, the savings produced by generics have actually driven average prescription prices down in Medicare's pharmacy benefit and Medicaid, according to a new analysis by the Congressional Budget Office.

Why it matters: The analysis reiterates that the generic market is largely working as intended.