"Q1 2021 - Who's Driving the Economy?"
By: Joseph R. Tranchini, CFA
GROSS DOMESTIC PRODUCT
- The U.S. Economy continued its expansion in Q1 21’ at a pace of 6.4% (SAAR), which constitutes an acceleration in growth from the prior quarter where the economy expanded at a rate of 4.3% (SAAR)1,2
- The Consumption component of GDP experienced the highest rate of growth of all components, expanding at a rate of 10.7% which is also an acceleration from the prior quarter where Consumption grew at a steadier pace of 2.7%. Spending on Goods far outpaced spending on Services, with each growing at a rate of 23.6% and 4.6% respectively. Standout areas within Goods include spending on Motor Vehicles at 51.5%, Furnishings & Household Equipment at 45.3%, and Clothing & Footwear at 33.8%. All sub-categories within Goods experienced positive growth1,2
- The Investment component of GDP experienced a moderate contraction for Q1 21’ at a rate of -5.0%, a sharp deceleration from the prior quarter when Investment grew a pace of 27.8%. Investment in Residential Single-Family structures experienced continued robust growth at a pace of 30.6% with investment in Multi-Family structures growing at a lower rate of 4.1%. Both Single & Multi-Family investment growth remain historically high, however decelerated from the prior quarter. Investment in Non-Residential structures experienced a stark contrast from its Residential counterpart, having contracted at a pace of -4.8% with all sub-categories experiencing declines such as Commercial & Health care at -13.1%, Power & Communication at -10.3%, and Manufacturing at -0.7%. This marks the 4th consecutive quarter all sub-categories of Non-Residential structure investment were simultaneously negative1,2
- Net Exports
- Net Exports contributed negatively to GDP growth for the quarter with negative effects from a decline in Exports of -1.1%, as well as from an increase in Imports of 5.7%. The U.S. Trade Deficit reached a new all-time quarterly high of -$1.175T. This marks the second consecutive quarter that the U.S. Trade Deficit reached a new quarterly all-time high1,2
- Fiscal Stimulus spending contributed heavily to growth in Government spending for the quarter, which grew at a pace of 6.3%. Federal Government spending was the highest growing sub-component, having grown at a pace of 13.9%. State & Local Government spending grew modestly at a pace of 1.7% breaking a 3 consecutive quarter streak of successive contractions1,2
- The Unemployment Rate has continued to trend downward over the past calendar year and currently stands at a rate of 6.1%, a drastic improvement from the high of 14.7% in April of 20201,3
- The number of employed individuals has dropped by roughly 8M relative to pre-pandemic levels, however the Labor Force has also declined by roughly 4M1,3
- The Duration of Unemployment has ticked up from previous quarters, with roughly 57% of currently unemployed individuals having been without work for greater than 15 weeks. Federal Reserve Beige Book observations have noted that employers have had difficult times enticing workers to return back into the labor force1,3,4
- Weekly Initial Claims have improved modestly as of recent to a level of 498,0001,3
- Continuing Claims continue to improve gradually to a level of 3.69M as further re-opening of the economy has reestablished jobs in some of the hardest hit industries1,3
- The Labor Force Participation ratio has stagnated since June of 2020, holding a level of 61.7%. Pre-Pandemic Labor Force Participation was roughly around 63.3%1,3
- The Labor Force has shrunk by roughly 4M since pre-pandemic levels while the Civilian Noninstitutional Population has grown by roughly 1M1,3
- Some noteworthy industries that have experienced robust job growth over the past calendar year include:
- Retail Trade: 1992k jobs regained out of 2392k lost: Recapture 83%1,3
- Construction: 974k jobs regained out of 1170k lost: Recapture 83%1,3
- Transport/Warehouse: 561k jobs added from 627k lost Recapture 89%1,3
- Industries that have experienced mild job growth or contractions over the past year include:
- State Gov: 133k jobs added from 459k lost: Recapture 29%1,3
- Local Gov: 582k jobs added from 1534k lost: Recapture 38%1,3
- Manufacturing: 906k jobs added from 1421k lost: Recapture 64%1,3
- Headline PCE Inflation remains elevated, expanding at a rate of 6.4% (SAAR), with Core PCE Inflation coming in lower at a rate of 4.4% (SAAR)1,5
- Both measures of Inflation remain above the Federal Reserve’s average annual inflation target of 2.0% (SAAR)1,5
- Both the Goods & Services components experienced higher than target levels of inflation at 8.5% and 5.3% respectively1,5
- Within Goods, Non-Durable Goods grew at a pace of 10.1% (SAAR) which was almost entirely driven by increases in Gasoline & Energy Goods which grew at a rate of 167.1%. Energy-related prices remain a large source of inflation. Durable Goods inflation was 5.6% and was largely driven by increases in Household Furnishings & Equipment which grew at a pace of 11.5%1,5
- The Services component of PCE Inflation grew at a pace of 5.3% (SAAR) and was largely driven by inflation in Transportation Services, which grew at a pace of 18.8%1,5
- Market-based measures of expected future inflation have continued to rise sharply over the past year with the 10yr TIPS Spread currently around 2.40%, as well as the 5yr TIPS Spread coming in around a level of 2.57%6,7
- Both measures have not reached a level this high since around 20136,7
- Over the past year, both 5yr and 10yr TIPS Spreads have risen by a historically high amount, albeit off a low base. The only other time when inflation expectations have risen this sharply over a calendar year was at the end of the Global Financial Crisis in 08-09’6,7
- With both 5r & 10yr TIPS Spreads breaching the 2.0% level, market participants are loosely predicting that the Federal Reserve will be successful in targeting a level of inflation higher than the 2.0% average target coming out of the pandemic to anchor Inflation Expectations to the 2.0% level over the long-term6,7
HIGH FREQUENCY ECONOMIC DATA
- The WEI Index has continued to show improvement since the initial drawdown in high frequency economic data from the initial lockdown period of the pandemic8
- From March 13 onward, the WEI Index has shown a considerable increase primarily due to low-base economic comparisons from the initial lockdown stage of the pandemic a year ago8
FORWARD LOOKING ASSESSMENT
The U.S. economy’s growth accelerated in Q1’ 2021 as further re-normalization trends contributed materially to economic growth and job creation in a fairly uniform fashion across many industries. An accelerated growth rate of 6.4% (SAAR) was comprised of robust spending on behalf of consumers, as well as continued momentum in fixed investment on behalf of businesses. Interest rate-sensitive pockets of the economy appear to be areas of particular importance with consumer spending on “big-ticket” items such as vehicles and major household appliances experiencing historically high rates of growth. Private investment continues to be bolstered by sustained positive trends in residential housing, even as non-residential investment in commercial structures continues to experience sustained contractions likely as a result of investment focus shifting to an abnormally hot housing market, and as work-from-home trends force a secular re-think of commercial real estate.
Recent job growth has also accelerated as industries that where asymmetrically effected by the pandemic continue to further re-normalize day-to-day operations and hire back workers to fulfill new levels of higher capacity. Although enticing workers back into the labor force has continued to be a noted source of difficulty, wage increases and schedule flexibility have appeared to be useful tools in attracting individuals back to work. However, there is one point regarding overall employment that warrants much further consideration, productivity. In sequential growth terms, U.S. GDP has largely returned to where it was in the periods preceding the pandemic, this is despite the Labor Force shrinking by approximately 4M individuals, and despite the number of employed individuals shrinking by roughly 8M. Taken together, this would imply that the U.S. economy has taken a large leap forward in productivity. Important to note, productivity is a long-term trend that does not increase greatly overnight. Rather, it may be more rooted in reality that the current level of productivity has actually been achievable for quite some time, and that it took a global pandemic to trim excess labor from the economy. Yet another example of a longer-term trend that was accelerated by the pandemic. Additionally, this observation may confirm what many economists have suspected for a long time, that technological advancements can outpace an ageing population and provide a progressively positive backdrop for economic growth despite a shrinking Labor Force.
Inflation measures, both Headline and Core, remain elevated well north of the Federal Reserve’s average annual target of 2.0%. Energy-related costs continue to be material contributors to Headline inflation as demand-pull effects from pickups in economic activity are being exacerbated by supply-chain disruptions attributable to labor shortages, a common theme across multiple commodity markets at present time. Additionally, interest rate-sensitive items such as household appliances, vehicles, and furniture continue to experience sustained levels of abnormal inflation as downstream effects from a strong housing market continue to drive overall inflation numbers. Finally, a further re-normalization of commuting trends has mean-reverted transportation-related prices back to pre-pandemic levels from a depressed low. Therefore, recent inflation in transportation prices may constitute a reversion to normal levels rather than a progressive new inflationary high.
It takes two to tango. Both Secular & Cyclical trends have contributed in large ways to the economy’s recent stretch of robust growth. Strong cyclical growth from an opportunistic housing market and its related effects has combined with the manifestation of longer-term secular trends, such as productivity increases attributable to technological innovation, to create a positive backdrop for economic growth. Vaccine progress and further re-normalization trends have given the hardest hit industries opportunities to add back lost jobs and re-fulfill historical levels of capacity. Although inflation does remain robust and north of the Federal Reserve’s long-term target, it is unlikely that a continuation of recent pricing trends in Energy and Transportation could be sustained for a meaningfully long period of time and would therefore constitute transitory pricing pressures. With the possibility of historic levels of infrastructure stimulus, as well as with additional slack still left in the labor market, the U.S. economy appears to be setting the stage for a sustained period of beneficial growth.
[See Below for Disclosures & Annotations]
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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- FactSet. “Economics – Country/Region – United States”. April 29, 2021
- Bureau of Economic Analysis. “Gross Domestic Product, 1st Quarter and Year 2021 (Advance Estimate)”. April 29, 2021
- Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. May 7, 2021
- Federal Reserve. “The Beige Book: Summary of Commentary on Current Economic Conditions”. April 14, 2021.
- Bureau of Economic Analysis. “Personal Income”. April 30, 2021
- FRED. “5-Year Breakeven Inflation Rate”. April 30, 2021
- FRED. “10-Year Breakeven Inflation Rate”. April 30, 2021
- Federal Reserve Bank of New York. “Weekly Economic Index (WEI)”. April 29, 2021