Economic activity continued to recover over the first half of 2011, but the pace of the expansion has been modest. The subdued rate of expansion reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer spending as well as supply chain disruptions associated with the tragic earthquake in Japan. Nonetheless, even after setting aside temporary influences, the growth of economic activity appears to have slowed over the first half of this year. Conditions in the labor market remain weak. Although the average pace of job creation picked up during the early months of the year, employment growth softened in May and June and the unemployment rate edged up. Meanwhile, consumer price inflation increased noticeably in the first part of the year, reflecting in part higher prices for some commodities and imported goods as well as shortages of several popular models of automobiles. The recent rise in inflation is expected to subside as the effects of past increases in the prices of energy and other commodities dissipate in an environment of stable longer-term inflation expectations, and as supply chain disruptions in the automobile industry are remediated.
On net, financial market conditions became somewhat more supportive of economic growth in the first half of 2011, partly reflecting the continued monetary policy accommodation provided by the Federal Reserve. Yields on Treasury securities and corporate debt as well as rates on fixed-rate residential mortgages fell to very low levels, on balance, over the first half of the year, and equity prices rose. Borrowing conditions for households and businesses eased somewhat further, although credit conditions remained tight for some borrowers.
After rising at an annual rate of 2-3/4 percent in the second half of 2010, real gross domestic product (GDP) increased at about a 2 percent rate in the first quarter of 2011. Available information suggests that the pace of economic growth remained soft in the second quarter. Real consumer spending, which had brightened near the end of 2010, rose at a noticeably slower rate over the first five months of 2011, as household purchasing power was constrained by the weak pace of nominal income growth and by rising fuel and food prices, and as consumers remained downbeat. Meanwhile, the housing market continued to be weighed down by the large inventory of vacant houses for sale, the substantial volume of distressed sales, and by homebuyers' concerns about the strength of the recovery and fears of future declines in house prices. In the government sector, state and local government budgets continued to be very tight, as a reduction in federal assistance to those governments was only partially offset by an increase in tax collections; in addition, federal spending appears to have contracted. In contrast, exports--which have been a bright spot in the recovery--moved up briskly, and businesses continued to increase their outlays for equipment and software.
In the labor market, private payroll employment gains picked up in the first four months of the year, averaging about 200,000 jobs per month, an improvement from the average of 125,000 jobs per month recorded in the second half of 2010. However, private employment gains slowed sharply in May and June, averaging only 65,000 per month, with the step-down widespread across industries. Furthermore, the unemployment rate, which leveled off at around 9 percent in the early months of the year, has edged up since then, reaching 9.2 percent in June. The share of the unemployed who have been jobless for six months or longer remained close to 45 percent, a post–World War II high.
Consumer price inflation picked up noticeably in the first part of 2011. Prices for personal consumption expenditures rose at an annual rate of about 4 percent over the first five months of the year, compared with an annual rate of increase of a little less than 2 percent during the second half of 2010. A significant portion of the rise in inflation was associated with energy and food prices, reflecting the pass-through to retail prices of surges in the costs of crude oil and a wide range of agricultural commodities. Recently, however, these commodity prices have apparently stabilized, a development that should ease pressure on consumer energy and food prices in coming months. Another important source of upward pressure on inflation during the first half of the year was a sharp acceleration in the prices of other imported items. This factor contributed to a pickup in consumer inflation for items other than food and energy; over the first five months of this year, such inflation ran at an annual rate of more than 2 percent, up from an unusually low 1/2 percent annual rate of increase over the second half of 2010. Despite the increase in inflation, longer-term inflation expectations remained stable.
In U.S. financial markets, strong corporate pr