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."