(Reuters) - The U.S. economy likely gained steam in the second quarter, with the pace of growth probably the second-fastest in 38 years, as massive government aid and vaccinations against COVID-19 fueled spending on travel-related services.


The anticipated acceleration in gross domestic product last quarter would lift the level of GDP above its peak in the fourth quarter of 2019. Even with the second quarter likely marking the peak in growth this cycle, the economic expansion was expected to remain solid for the remainder of this year.


A resurgence in COVID-19 infections, driven by the Delta variant of the coronavirus, however, poses a risk to the outlook. Higher inflation, if sustained, as well as ongoing supply chain disruptions, could also slow the economy. The Commerce Department will publish its snapshot of second-quarter GDP growth on Thursday at 8:30 a.m EDT (1230 GMT).


"Consumers have plenty of income and wealth ammunition to support consumer spending, while business inventories remain lean and restocking efforts are poised to support business investment and overall GDP growth substantially in the second half of the year," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.


The Federal Reserve on Wednesday kept its overnight benchmark interest rate near zero and left its bond-buying program unchanged. Fed Chair Jerome Powell told reporters that the pandemic's economic effects continued to diminish, but risks to the outlook remain. read more


The economy likely grew at an 8.5% annualized rate last quarter, according to a Reuters survey of economists. That would be the second-fastest GDP growth pace since the second quarter of 1983. The economy grew at a 6.4% rate in the first quarter, but that is subject to revision.


With the second-quarter estimate, the government will publish revisions to GDP data. Given that this is not a comprehensive benchmark revision, economists expect only modest changes to previously published estimates.


The National Bureau of Economic Research, the arbiter of U.S. recessions, declared last week that the pandemic downturn, which started in February 2020, ended in April 2020.


Economists expect growth of around 7% this year, which would be the strongest performance since 1984. The International Monetary Fund on Tuesday boosted its growth forecasts for the United States to 7.0% in 2021 and 4.9% in 2022, up 0.6 and 1.4 percentage points respectively, from its forecasts in April.


President Joe Biden's administration provided $1.9 trillion in pandemic relief in March, sending one-time $1,400 checks to qualified households and extending a $300 unemployment subsidy through early September. That brought the amount of government aid to nearly $6 trillion since the pandemic started in the United States in March 2020.


STRONG CONSUMER SPENDING


Nearly half of the population has been vaccinated against COVID-19, allowing Americans to travel, frequent restaurants, attend sporting events, and engage in other services-related activities that were curbed early in the pandemic.


The pick-up in services likely boosted consumer spending in the second quarter, with double-digit growth anticipated in the segment that accounts for more than two-thirds of the U.S. economy. While spending on goods remained strong, the pace likely slowed from earlier in the pandemic, when Americans were cooped up at home.


Some of the slowdowns in goods spending reflects shortages of motor vehicles and other appliances, whose production has been hampered by tight supplies of semiconductors across the globe. Higher prices, with inflation above the Fed's 2% target, could also be causing some to postpone purchases.


Though the fiscal boost is fading and COVID-19 cases are rising in states with lower vaccination rates, consumer spending will likely continue to grow.


"Those states also tend to be the ones most resistant to public health measures to combat the pandemic, such as mask mandates and limits on indoor activities," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.


"Thus, the types of widespread restrictions on economic activity seen earlier in the pandemic, and then again in late 2020 and early 2021, are unlikely to be widely reimposed, which will greatly limit the economic fallout from the Delta variant and increasing coronavirus cases."


Households accumulated at least $2 trillion in excess savings during the pandemic. Record high stock market prices and accelerating home prices are boosting household wealth. Wages are also rising as companies compete for scarce workers.


A separate report from the Labor Department on Thursday is likely to show the labor market recovery gaining traction. According to a Reuters survey, 380,000 people likely filed new claims for unemployment benefits last week.


Initial claims rose to a two-month high in the week ended July 17, but economists blamed the jump on difficulties stripping out seasonal fluctuations from the data.


"The likely temporary rise in initial claims could partly be related to seasonal adjustment issues or a larger reduction in employment in the auto sector around the usual break in summer auto production given supply issues facing the industry," said Veronica Clark, an economist at Citigroup in New York.


The economy likely received a further boost from business investment, especially on equipment, as companies ramp up production, though spending on nonresidential structures such as mining exploration, shafts, and wells probably declined for a seventh straight quarter.

Trade was likely a drag on GDP growth for a fourth straight quarter as strong demand sucked in imports. Expensive building materials and soaring house prices likely weighed on the housing market in the second quarter.

The U.S. economic recovery is still on track despite a rise in coronavirus infections, the Federal Reserve said on Wednesday in a new policy statement that remained upbeat and flagged ongoing talks around the eventual withdrawal of monetary policy support.

In a news conference following the release of the statement, Fed Chair Jerome Powell said the U.S. job market still had "some ground to cover" before it would be time to pull back from the economic support the U.S. central bank put in place in the spring of 2020 to battle the coronavirus pandemic's economic shocks.

"I would want to see some strong job numbers" in the coming months before reducing the $120 billion in monthly bond purchases the Fed continues to make, he told reporters.

But Powell also downplayed, at least for now, the risk that the renewed spread of the coronavirus through its more infectious Delta variant will put the recovery at risk or throw the Fed off track as it plans an exit from crisis-era policies.

"It will have significant health consequences" in the areas of the country where outbreaks are intensifying, Powell said. Yet in the prior waves of coronavirus infections "there has tended to be less in the way of economic implications ... It is not an unreasonable expectation" that would remain the case this time, he added.

"It seems like we have learned to handle this," with progressively less economic disruption, Powell said, even as he acknowledged a fresh outbreak might to some degree slow the return of workers to the labor market or disrupt planned school reopenings in the fall.

The Fed's policy statement, issued after the end of a two-day policy meeting, reflected that confidence as the central bank continues debating how to wind down its bond purchases.

There appeared to progress in that discussion, though no clear timetable for reducing the bond purchases. Powell said there was "very little support" for cutting the $40 billion in monthly purchases of mortgage-backed securities "earlier" than the $80 billion in Treasuries, and that once the process begins "we will taper them at the same time."

Overall, however, the Fed seemed unfazed by the spread of the Delta variant, even though new daily coronavirus infections have roughly quadrupled since the Fed's June 15-16 policy meeting.

"With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen," the central bank said in its statement.

Though vaccinations have slowed - and Powell plugged inoculation as the best chance to get the economy durably back to normal - the Fed said it still expected vaccinations to "reduce the effect of the public health crisis on the economy."

That should translate into strong job growth, Powell said, and eventually, allow the Fed to move away from its crisis-era programs.

In December, the Fed said it would not change its asset-buying program until there had been "substantial further progress" in repairing a labor market that was then 10 million jobs short of where it was before the pandemic.

That number is now below 7 million, and the Fed for the first time acknowledged the economy had taken a step towards its benchmark for trimming the purchases.

"The economy has made progress, and the (Federal Open Market) Committee will continue to assess progress in coming meetings," the Fed said in language pointing towards a possible reduction in bond purchases later this year or early in 2022.

The Fed also said that higher inflation remained the result of "transitory factors," and was not an imminent risk to the economy or the Fed's policy plans.

'MORE UPBEAT'

Along with leaving its bond-buying program unchanged, the central bank on Wednesday kept its overnight benchmark interest rate near zero.

Karim Basta, the chief economist at III Capital Management, said the "incrementally more upbeat" policy statement opened the door to a September bond taper announcement if job growth comes in strong and the coronavirus caseload does not dent spending.

Acknowledging some progress towards their goals "seems designed to give them the option to announce" as soon as September their plans for winding down the bond purchases, he wrote.

The S&P 500 (.SPX) index, which was modestly lower before the release of the policy statement, ended the session flat. Yields on U.S. Treasuries fell in choppy trading, while the dollar (.DXY) was slightly weaker against a basket of currencies.

 Facebook Inc (FB.O) said on Wednesday it expects revenue growth to "decelerate significantly," sending the social media giant's shares down 3.5% in extended trading even as it reported strong ad sales.

The warning overshadowed the company's beat on Wall Street estimates for quarterly revenue, bolstered by increased advertising spending as businesses build their digital presence to cater to consumers spending more time and money online.

Facebook said it expects Apple's (AAPL.O) recent update to its iOS operating system to impact its ability to target ads and therefore ad revenue in the third quarter. The iPhone maker's privacy changes make it harder for apps to track users and restrict advertisers from accessing valuable data for targeting ads.

The company also announced on Wednesday that it would require anyone working at its U.S. offices to be vaccinated against COVID-19, joining Alphabet Inc (GOOGL.O) and Netflix (NFLX.O)

Monthly active users came in at 2.90 billion, up 7% from the same period last year but missing analyst expectations of 2.92 billion and marking the slowest growth rate in at least three years, according to IBES data from Refinitiv.

"The user growth slowdown is notable and highlights the engagement challenges as the world opens up. But importantly, Facebook is the most exposed to Apple's privacy changes, and it looks like it is starting to have an impact on the outlook beginning in 3Q," said Ygal Arounian, an analyst at Wedbush Securities.

Brian Wieser, GroupM's global president of business intelligence, said all social media companies would see slower growth in the second half of the year and that it would take more concrete warnings about activity in June and July for anyone to anticipate a "meaningful deceleration."

Facebook's total revenue, which primarily consists of ad sales, rose about 56% to $29.08 billion in the second quarter from $18.69 billion a year earlier, beating analysts' estimates, according to IBES data from Refinitiv.

Its revenue from advertising rose 56% to $28.58 billion in the second quarter ended June 30, Facebook said. It pointed to a 47% increase in price per ad.

A Facebook panel is seen during the Cannes Lions International Festival of Creativity, in Cannes, France, June 20, 2018.  REUTERS/Eric Gaillard/File Photo
A Facebook panel is seen during the Cannes Lions International Festival of Creativity, in Cannes, France, June 20, 2018. REUTERS/Eric Gaillard/File Photo

"In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth," Chief Financial Officer Dave Wehner said in the earnings release.

Net income in the second quarter more than doubled to $10.4 billion, or $3.61 per share. Analysts had expected a profit of $3.03 per share.

The world's largest social network has been ramping up its e-commerce efforts, which are expected to bring additional revenue to the company and make its ad inventory more valuable. The push will be key to how Facebook, which hosts more than 1 million online "Shops" on its main app and Instagram, can grow its ad business amid the impact of Apple's changes.

It is also on the offensive to attract top social media personalities and their fans, competing with Alphabet's YouTube and short-video app TikTok, which recently hit 3 billion global downloads. Facebook said this month it would invest more than $1 billion to support content creators through the end of 2022. 

On a conference call with analysts, CEO Mark Zuckerberg also focused on another ambition for the company: the "metaverse."

Zuckerberg this week announced that Facebook, which has invested heavily in virtual reality and augmented reality, was setting up a team to work on building a shared digital world, which he is betting will be the successor to the mobile internet. Microsoft (MSFT.O) also dropped the buzzy Silicon Valley term on its earnings call this week, talking about its own plans for the converging digital and physical worlds. 

"Facebook has its eye on a sci-fi prize," said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown. "This is little more than an ambition for Facebook at the moment...if the idea comes to fruition, it could be a valuable income source."

The company also continues to face pressure from global lawmakers and regulators, including from the U.S. Federal Trade Commission which has until Aug. 19 to refile its antitrust complaint against the company, and from a group of states who said on Wednesday, they would appeal the judge's dismissal of their lawsuit. Facebook's market cap hit $1 trillion for the first time last month when the judge threw out the original complaints. 

The company, which has long been under fire from lawmakers over misinformation and other abuses on its apps, has also come under renewed scrutiny from President Joe Biden's administration over the handling of false claims about COVID-19. At Facebook's office in Washington, D.C., on Wednesday, a group of critics sets up an installation of body bags to protest the issue.

Inventories, which were sharply drawn down in the first quarter, are a wild card. Supply constraints have made it difficult for businesses to replenish stocks. An improvement is, however, expected in the second half as spending shifts further to services from goods.