"Q1 2021 - Who's Driving the Economy?"

  • By: Joseph R. Tranchini, CFA
  • May 2021










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.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.



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