Notes on the Economy – 2Q 2021 Summary

BLAST OFF!

The U.S. economy has blasted off, heading on a high-growth trajectory for 2021. Growth of real GDP (the total output of goods and services) during the first quarter of 2021 exhibited a very strong gain. The advance estimate by the Bureau of Economic Analysis (BEA) shows real GDP grew an annualized 6.4%. A spectacular 10.7% rebound of consumer spending was the main driver. The rebound was fueled by a release of pent-up demand as COVID-19 restrictions were relaxed and by the federal government’s various pandemic-relief payments supporting individuals and businesses.

Among major developed economies, the United States has now taken the lead in the “growth rebound derby.” Virtually all central banks have loosened monetary policies moving short-term policy rates to near, or even below, zero and engaging in active quantitative easing. Fiscal policies have also been universally expansionary, with U.S. fiscal policy being the most aggressive. Additionally, the U.S. vaccination campaign has been among the most successful, with more than 60% of the adult population having received at least the first dose in the process. Among the developing and emerging-market (EM) countries China stood out during 2020, with rapid real GDP growth in all but the first quarter. However, its first quarter 2021 growth was only 0.6% (not annualized). Recovery throughout most of the EMs has lagged the developed world, as COVID-19 continues to suppress economic activity and vaccination progress is slow.

HEADLINES – WHAT’S IMPORTANT

• Vaccination Has Lifted Prospective 2021 Growth – Successful vaccination roll-out in the United States will facilitate a near-complete economic reopening by summer, paving the way for a continued high-growth rebound.
• Inflation Concerns Move Up – A near-term price spurt is not the issue, but the odds of a mistaken application of expansionary policies after an economic recovery is complete have gone up a notch.
• Bonds Are Mostly Safe, for the Time Being – Yields are low, and credit spreads are narrow, as federal stimulus has reduced credit risks for corporate and tax-exempt bonds alike. Yet, strong economic growth will lead to yield-curve steepening.
• Stocks Levered to a Reopened Economy Will Do Best – Cyclical value stocks in the United States should benefit most from the rebound and are less sensitive to correction risks posed by a possible upward drift in bond yields.

LOOKING AHEAD

The U.S. economy should be on a high growth path throughout 2021. Real GDP in 2021 could be 6.6% higher than in 2020. Recent macroeconomic indicators (in addition to first-quarter real GDP) are certainly encouraging. For example, during the first four months of 2021, the Institute for Supply Management’s purchasing managers indices (PMIs) for both manufacturing and services have run well above their pre-pandemic levels. April PMIs were 60.7% for manufacturing and 62.7% for services. (Readings above 50.0% are consistent with expanding business activity.)

Consumer spending accelerated markedly in the first quarter of 2021, advancing at an annualized rate of 10.7%. Consumers will be the main engine of economic growth for 2021. The end of most COVID-19-related restrictions on mobility will allow a continuing release of pent-up consumer demand. A pile of surplus savings, expanding employment opportunities, and readily available, inexpensive credit will provide the necessary financial support.

Aggregate world economic growth should rebound substantially in 2021 to advance 6.0% for the year, in contrast to its COVID-19-induced decline of 3.3% in 2020, according to the International Monetary Fund (IMF). Although there is reason for optimism overall, results are not likely to be uniform across geographies. Vaccination programs appear to be well underway in most developed economies, but many EMs lag. In addition, China’s recent policy decision to slow credit growth poses the risk of slower growth for many other EMs.

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