The U.S. economy has the wind at its back.
As we approach the Memorial Day weekend—the unofficial start to summer here in the U.S.—we’re also at a redemptive crossroads in our battle against the coronavirus. The success of Operation Warp Speed last year led to a surge in vaccine distribution to 3.5 million daily jabs in mid-April. Previously closed states are now beginning to reopen, which will shift the economy from “lockdown” to “jail break,” as activities continue to normalize: return to work and school, the psychologically important lifting of mask mandates and the opening of restaurants, bars, retailers, sporting events and leisure travel. Money is burning a hole in our pockets, as the personal savings rate leapt to 27.6% in March 2021—quadruple the 6.6% average over the past 20 years, due to the federal government’s direct payments and generous unemployment benefits. We could be in the middle of an economic melt-up this spring and summer.
Labor market continues to heal Initial weekly jobless claims have plunged to a fresh post-pandemic low, down 93% from their peak of 6.15 million in April 2020 to 406,000 last week, reported yesterday. ADP added the most private payroll jobs in seven months in April, posting a 31% month-over-month increase to 742,000 jobs, compared with 565,000 in March and only 180,000 jobs in February. JOLTS posted a much stronger-than-expected gain in March to a record high of 8.123 million job openings. With 24 states (and counting) working to end President Biden’s $300 weekly federal unemployment bonuses earlier than scheduled, we expect nonfarm payrolls to improve sharply in coming months.
Consumer in pretty good shape Because of the annual calendar rotation with Easter and Passover, we routinely look at retail sales in March and April combined, and compare their results to the same 2-month, year-ago period. While the combination of March and April in 2021 soared by 29.1% on a year-over-year (y/y) basis from depressed 2020 levels, this year’s “Mapril” results were also 21.1% above relatively normal results from March and April in 2019. In sharp contrast, Mapril 2019 gained 3.5% compared with 2018, which in turn was 4.4% stronger than Mapril 2017.
Autos hit a new 31-year cycle high in April with sales of 18.51 million annualized units. The housing market is at a 15-year high due to low mortgage rates and strong demand. But a lack of inventory and rising commodity costs may temper some of the summer’s typical seasonal strength.
Supply-chain bottlenecks Manufacturing orders and shipments have rebounded strongly across the board over the past several quarters as the economy has recovered, although weather-related problems in February and recent supply-chain logjams have created some problems. Because of this, companies added $62 billion to their inventories in last year’s fourth quarter, but inventories surprisingly declined by $93 billion in this year’s first quarter despite strong demand. We expect this to ease over the summer, providing a robust boost to GDP.
Strong productivity and profits Productivity surged sequentially 5.4% in the first quarter, which drove a much stronger-than-expected y/y increase in corporate profits of 49%. The average beat rate of 22% is the second strongest on record. Second-quarter earnings could be even better, with a 60-70% y/y gain.
‘Transitory’ or ‘sustainable?’ We are now experiencing a “procedural base effect,” dropping off low and negative inflation readings from a year ago and replacing them with stronger readings from this year, due to rising commodity and labor costs (a trend that likely will continue over the next few months). April’s 4.6% core PPI is a record high and the core CPI of 3% is a 26-year high. Core PCE for April came in at 3.1%, a 29-year high. Will these levels plateau this summer and recede, as the Fed believes, or continue to grind higher into the second half of this year and beyond, as the market is beginning to fear?
Raising our GDP estimates The fixed-income, equity and liquidity investment professionals who comprise the Federated Hermes macroeconomic policy committee met Wednesday to discuss the accelerating economic rebound:
- First quarter 2021 GDP was unrevised yesterday at 6.4%.
- As we approach adult herd immunity, we will unleash stronger economic activity. So we increased our second-quarter 2021 GDP growth estimate from 8.3% to 9.2%. The Blue Chip consensus also raised its forecast from 8.7% to 9.2% (within a range of 6.9% to 11.7%). The Atlanta Fed’s GDPNow forecast is at 10.1%.
- We’re expecting a strong back-to-school season, so we tweaked our third-quarter 2021 growth estimate from 7.9% to 8.1%. The Blue Chip lowered its forecast from 7.5% to 7.2% (within a range of 4.9% to 10%).
- We’re also expecting a strong Christmas, so we nudged our fourth-quarter 2021 estimate from 5.9% to 6%. The Blue Chip raised its from 4.9% to 5.1% (within a range of 2.9% to 7.4%).
- Those changes raised our full-year 2021 GDP growth estimate from 6.4% to 6.8%. The Blue Chip increased its from 6.3% to 6.6% (within a range of 6% to 7.3%). If achieved, that would be the strongest full-year growth since 1984, when the U.S. economy grew 7.2%.
- We raised our forecast for core CPI inflation from 2.6% to 3.1% for 2021, up from a trough of 1.2% in June 2020 (a 9-year low); we are also raised our forecast for core PCE inflation from 2.2% to 2.6% in 2021, from a trough of 0.9% in April 2020 (a 10-year low).
- But we are becoming increasingly more concerned about the potential fiscal drag from higher tax rates embedded in President Biden’s $4.7 trillion “infrastructure” proposal, which will be debated in Congress this summer. So we reduced our full-year 2022 GDP estimate from 4.6% to 4.2%. The Blue Chip raised its forecast from 4.3% to 4.4% (within a range of 3.3% to 5.5%).
- We reduced our forecast for core CPI inflation from 2.8% to 2.7% for 2022, and we left our forecast for core PCE inflation unchanged at 2.4% in 2022.
Happy Memorial Day Weekend!