The U.S. economy has roared back to life in 2021, with
first-quarter growth set to defy even the rosiest expectations as another fresh
influx of cash looms.
Manufacturing data Monday showed the sector at its highest
growth level since August 2018. That report from the Institute for Supply
Management in turn helped confirm the notion among economists that output to
start the year is far better than the low single-digit growth many had been
predicting in late 2020.
The Atlanta Federal Reserve, which tracks data in real time
to estimate changes in gross domestic product, now is indicating a 10% gain for
the first three months of the year. The GDPNow tool generally is volatile early
in the quarter then becomes more accurate as the data rolls in through the
period.
That comes on the heels of a report Friday showing that
personal income surged 10% in January, thanks largely to $600 stimulus checks
from the government. Household wealth increased nearly $2 trillion for the
month while spending rose just 2.4%, or $340.9 billion.
Those numbers, along with a burst of nearly $4 trillion in
savings, pointed to an economy not only growing powerfully but also one that is
poised to continue that path through the year.
“The V-shaped recovery in real GDP will remain V-shaped during
the first half of this year and probably through the end of the year,” Ed
Yardeni of Yardeni Research wrote in his daily note Tuesday. “However, it will
no longer be a ‘recovery’ beyond Q1 because real GDP will have fully recovered
during the current quarter. Thereafter, GDP will be in an ‘expansion’ in
record-high territory.”
Economists previously hadn’t expected the $21.5 trillion
U.S. economy to regain its pandemic-related losses until at least the second or
third quarter of this year, if not later.
But a combination of systematic resilience combined with
previously unimaginable doses of fiscal and monetary stimulus have helped speed
the recovery along considerably. The final quarter of 2020, in which GDP
increased 4.1%, left the total of goods and services produced just $270 billion
shy of the same period a year previous, before Covid-19 struck.
“With strong federal fiscal support and continued progress
on vaccination, GDP growth this year could be the strongest we’ve seen in
decades,” New York Federal Reserve President John Williams said in a speech
last week.
In fact, questions persist about whether the $1.9 trillion
spending plan from the Biden administration is necessary, at least to that
magnitude. An economy poised to show its fastest annual growth pace since at
least 1984 doesn’t seem like a very good candidate for more spending at a time
when the federal government already is expected to run a $2.3 trillion budget
deficit this year.
Respondents to the ISM report indicated soaring prices and
trouble with supply chains, with one manager in electrical equipment,
appliances and components noting: “Things are now out of control. Everything is
a mess, and we are seeing wide-scale shortages.”
Markets have worried lately that overheated growth could generate
inflation, particulary with the Federal Reserve continuing to keep its foot on
the policy pedal.
“Too much of a good thing is often just too much,” Yardeni
wrote. “The economy is hot and will get hotter with the bonfire of the fiscal
and monetary insanities.”
A major area of weakness
To be sure, frailties remain in the economy. Paramount among
them is the gap in employment, particularly in the services sector.
As of January, there were 8.6 million fewer employed than
there were a year ago, just before the pandemic began threatening the U.S.,
according to the Bureau of Labor Statistics. About 4.3 million Americans have
left the labor force in that time.
Despite a drop in the headline unemployment rate from a pandemic
high of 14.8% to 6.3%, employment in the hospitality sector has fallen by more
than 3.8 million from a year ago, and the jobless rate for the industry is
stuck at 15.9%, fully 10 percentage points higher than January 2020.
“The most glaring issue with where we stand now has to be
the labor market. We still have [nearly] 10 million jobs which are just simply
missing,” said Troy Ludtka, U.S. economist at Natixis. “You’re going to see a
situation in the coming years, looking back to this moment, where official
statistics on things like food insecurity, poverty and inequality are going to
reach generational highs.”
However, Ludtka sees promise ahead, thanks in part to
measures taken to address the ills of the current era.
“The good news is that we are very quickly rebounding, and
that is a sign of great promise,” he said. “We’re going to see an economy back
to pre-pandemic levels of output, we’re going to see a situation in which
unnecessary economic insecurity is mitigated.”
There’s even some better news coming out of the jobs market,
which despite the gaps that remain has recovered nearly 12.5 million nonfarm
payroll jobs since the recovery began in May 2020.
For one, job postings are on the rebound. Employment network
Indeed reports that listings through Feb. 12 were up a seasonally adjusted 3.9%
from Feb. 1, 2020, which it uses as the pre-Covid baseline. In early May 2020,
postings lagged the baseline by 39%.
Economists are counting on pent-up demand that vaccinations and
falling coronavirus numbers will bring to drive job growth. Nonfarm payrolls
for February are expected to show a gain of 210,000 when the BLS reports the
numbers Friday.
Questions of demand
“You’re going to see the growth rates in the middle of the
year probably close to 9%. That’s how strong the reopening of the U.S. economy
will be vis-a-vis the release of pent-up demand by the household sector,” said
Joseph Brusuelas, chief economist at RSM. “I don’t expect the pent-up demand to
all be released this year. I’m expecting it to take about two years to do that,
primarily because households will be somewhat cautious about the release of
cash.”
Indeed, the extent to which Americans in lockdown states
will come rushing outside their homes when restrictions are lifted is a matter
of debate.
Spending on the services part of the economy “is just a
different animal” than spending on goods that has boomed during the pandemic,
said Liz Ann Sonders, chief investment strategist at Charles Schwab.
“The whole pent-up demand is overrated, at least on the
goods side of the economy. If anything, we’re going to have pent-down demand on
the goods side,” Sonders said. “On the services side … it doesn’t persist for
an extended period of time. If you miss four vacations, you take one.”
Still, as the economic data continues to defy Wall Street
estimates – to an extent unseen in pre-pandemic times – the expectations are
growing that the risk to growth is clearly on the upside.
Michelle Meyer, U.S. economist at Bank of America Global
Research, said consumers showed tremendous resilience through the crisis that
should carry over into 2021, particularly with more stimulus coming.
“The important factor will be to get past the virus,” Meyer
said. “All else equal, the economy is on a pretty strong foundation.”
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