U.S. Review: U.S. Recovery Is Well on Its Way
- The U.S. economy expanded at a rapid clip in the first quarter and incoming data continue to paint a picture of an economic recovery gaining momentum. The public health situation continues to rapidly improve on a national scale with increased vaccinations leading to lower new daily cases, deaths and hospitalizations. The improving health position is giving way to a pickup in activity and an improvement in joblessness.
International Review: A Divergent Global Recovery Persists
- The international economic news was varied this week. Canadian activity data were robust, including a surge in retail sales and a gain in overall GDP in February. There were hints of a brief pause in China where April PMI data softened and in Mexico where Q1 GDP fell slightly, although the growth outlook for full-year 2021 remains encouraging. The weakest outcome was from the Eurozone where Q1 GDP fell 0.6% quarter-over-quarter, a second straight quarterly decline.
- Among next week’s events, we expect Brazil’s central bank to raise interest rates, while we expect the Bank of England to hold monetary policy steady. In Canada, given some uptick in COVID cases and some restrictions, there may be a brief pause in the labor market recovery in April.
Interest Rate Watch: A Brighter Fed Outlook but No Taper without “Substantial Further Progress”
- The FOMC meeting this week struck a more optimistic tone but did nothing to dissuade expectations that the current stance is set in stone…for now. The FOMC left its forward guidance around the fed funds rate and asset purchases unchanged.
Topic of the Week: American Families Plan Unveiled
- In a speech before Congress Wednesday night, President Joe Biden laid out the case for his “American Families Plan,” which includes $1.8 trillion in spending and tax cuts on a variety of social welfare issues, partially paid for with higher taxes on high-income individuals.
U.S. Recovery Is Well on Its Way
Data released this week showed the U.S. economy expanded at a rapid 6.4% annualized rate in the first quarter. The gain in output leaves the level of real GDP just a stone’s throw below its pre-COVID Q4-2019 level (see chart). We project the level of output to eclipse its pre-COVID position in the second quarter and for the remaining output gap to close by the end of the year. Most major areas of the economy expanded in the first quarter, but a considerable boost came from stimulus-fueled consumers.
U.S. households are flush with cash. Many households received their third, considerably larger stimulus check in March, which caused personal income to surge a record 21.1% during the month. In fact, many households received two stimulus checks during the first quarter, and even with the double-digit annualized gain in real personal consumption expenditures (+10.7%), the large influx of stimulus boosted the personal saving rate to 21% from 13% in the fourth quarter. In total, we estimate consumers are sitting on $2.2 trillion in “excess savings” through March, which is a considerable amount of dry powder at their disposal to fuel what is shaping up to be a consumer-led recovery.
In addition to cash-bloated consumers, the rapidly improving public health situation leaves us fairly optimistic on growth prospects this year. Through April 29, about 38% of U.S. adults are fully vaccinated and 55% of adults have received at least one does of a vaccine, according to the CDC. National daily case counts have fallen back below 60K, while deaths and hospitalizations have also moved lower. The improving virus situation is boosting confidence and leading to an ease of restrictions across the country.
New York City and Chicago both announced an easing of restrictions this week and NYC plans to move to a full reopening on July 1. That said, virus outbreaks in key areas of the country like Michigan and Oregon are stark reminders that even with an increasing portion of the population becoming vaccinated, the virus is not yet behind us and the economic recovery still depends on the trajectory of the virus.
The national improvement on the virus front to date has boosted optimism. Consumers report being the most optimistic since the start of the pandemic. Both the Conference Board’s consumer confidence index and the University of Michigan’s consumer sentiment index shot higher to fresh pandemic-era highs in April (see chart). As more Americans get vaccinated and warmer weather begins to spread across the United States, life is gradually returning to some semblance of normal and confidence is improving. Increased optimism bodes well for continued consumption as does an improvement in high-frequency mobility measurements, such as visits to retail locations, OpenTable seated diners and the number of people passing through TSA check points. Even with further progress to be made regarding the virus, consumers continue to become more comfortable venturing out, and perhaps, are learning to live with the virus.
The pickup in activity is also leading to a recovery in employment. We will get the official employment report for April next week, but the