Economic Outlook – 2 May 2021


• The Bureau of Economic Analysis put out its first estimate of Q1 GDP growth. The economy reportedly expanded an annualized 6.4% in the quarter, which was slightly less than the +6.7% print expected by consensus. Following in the wake of two solid showings in Q4 (+4.3%) and Q3 (+33.4%), this gain lifted economic output within 0.9% of its pre-crisis level

• Domestic demand remained strong in the quarter with non-residential investment (+9.9% QoQ annualized), residential investment (+10.8%) and consumption (+10.7%) expanding at a healthy clip. Consumption on services (+4.6% QoQ annualized) rebounded at a slower pace than did consumption on goods (+23.6%) owing to social distancing measures imposed to curb the spread of coronavirus. As a result, household spending on services remained 5.7% short of its pre-recession level, whereas spending on goods topped its pre-recession level by 12.5%. Government expenditures contributed to growth in the quarter as well, springing 6.3% annualized (their highest rate since 2002) as stimulus money continued to be rolled out and health spending remained elevated. Non-defence government outlays, for their part, grew the most since 1963 (+49.3 QoQ annualized). Trade, on the other hand, weighed on growth, as exports retreated (-1.1% QoQ annualized) and imports continued to advance (+5.7%). The rapid depletion of inventories, too, acted as a brake on growth

• The Q1 GDP print came in roughly in line with consensus expectations. Household consumption was the star performer in the report, but private investment had a good showing as well, so much so that domestic demand ended up contributing a whopping 9.9 percentage points to growth. This is a clear indication of just how vigorous the U.S. domestic economy was even before several states started relaxing pandemic restrictions

• Nominal personal income spiked 21.1% in March as assistance cheques reached households under the $1.9-trillion stimulus package adopted early in Joe Biden’s presidency. This was the biggest monthly increase registered in data going back to the 1940s. Income derived from government transfers surged 96.2% to $8,128.6 billion (seasonally adjusted at annual rates) on a massive gain in the “other” transfer segment (+507.4% MoM to $4,750.8 billion). Specifically, $4,044.2 billion were received via “economic impact payments”. Unemployment insurance benefits, meanwhile, edged up 1.1% (to $541.3 billions), as some emergency programs were extended, notably the Pandemic Unemployment Compensation Payments. As the labour market continued to recover, the wage/salary component of income progressed 1.1%. All these gains translated into an 23.6% increase in disposable income, the largest on record

• Nominal personal spending, for its part, progressed 4.2% in March and stood 3.5% above its pre-pandemic summit. While goods consumption stood 18.2% above its pre-crisis mark, services consumption was still 3.0% below its peak. The latter segment, which typically holds up better in times of recession, was hit harder during lockdowns and was recovering more laboriously because of rules of physical distancing imposed to limit the spread of the virus

• The Conference Board Consumer Confidence Index recorded another healthy advance in April, jumping 12.7 points to a 14-month high of 121.7. This gain came on the heels of an 18.6-point increase the prior month, the biggest monthly surge observed in nearly 18 years. Renewed optimism among U.S. consumers is certainly linked to the marked improvement of the health situation in the country, as well as to the deployment of generous fiscal aid by Washington. The present situation sub-index recorded its steepest monthly increase ever in March, springing from 110.1 to 139.6. This, however, remained significantly below its pre-recession peak of 166.7. The percentage of respondents who deemed jobs plentiful vaulted from 26.5% to a 13-month high of 37.9%. Also, 23.3% of respondents had a favourable view of current business conditions, up from 18.3% the prior month

• Durable goods orders resumed their upward trend in March, climbing 0.5% MoM. Although weaker than the +2.3% print expected by consensus, this gain nonetheless hoisted total orders 4.1%clear of their pre-crisis level (February 2020).The improvement in March was held back by a 1.7% decrease in the transportation category, where bookings for civilian (-46.9%) and defence aircraft (-20.2%) fell sharply. Orders in the vehicles/parts segment, on the other hand, expanded 5.5%, erasing part of the losses suffered the prior month. Excluding transportation, orders sprang a more convincing 1.6% and reached a new all-time high. There were notable gains recorded for fabricated metals (+3.6%), primary metals (+1.2%), and machinery (+1.0%).The report showed, also, that shipments of non-defence capital goods excluding aircraft, a proxy for business investment spending, jumped 1.3% MoM and were tracking a 10.3% annualized expansion in Q1 as a whole. Core orders, which are indicative of future capital spending, grew 0.9% in March, capping a 7.8% annualized gain in the first three months of the year

• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose a seasonally adjusted 1.17% MoM in February after climbing 1.25% in January. This was the 107th consecutive gain for this indicator. All of the cities covered by the index saw higher prices in February, led by San Diego (+2.15%) and Phoenix (+2.09%). Year on year, the index was up 11.9% (+11.1% in January), the sharpest jump over a period of 12 months since March 2014. The rapid rise in home prices in recent months is consistent with low borrowing costs and greater demand on the resale market. Aside from the resurgence in sales, lack of supply, too, has contributed to boost prices

• The saving rate jumped from 13.9% to an 11-month high of 27.6%. The excess savings accumulated since the beginning of the crisis now total $2.20 trillion – 10% of 2019 GDP Adjusted for inflation, disposable income soared 23.0% MoM, while spending sprang 3.6%. Still in March, the headline PCE deflator came in at 2.3% YoY, up from 1.5% the prior month and the highest since July 2018. The core PCE measure, meanwhile, rose four ticks to a 13-month high of 1.5%

• Initial jobless claims dropped from an upwardly revised 566K to a post-pandemic low of 553K in the week to April 24. Continued claims, meanwhile, edged up from 3,651K to 3,660K. Topping these up were the roughly 12.2 million people who received benefits in the week ended April 9 under two emergency programs: Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation

• As fully expected, the FOMC voted unanimously to leave the target range for the federal funds rate unchanged at 0% to 0.25% at the conclusion of its two-day meeting. It also kept on hold the IOER, the overnight reverse repo rate and the pace of QE. Moreover, unsurprisingly, the FOMC did not touch its forward guidance on the policy rate and QE either. As for the statement’s characterization of the economy/outlook, there were a few noteworthy tweaks:

• 1) The statement indicated that inflation had risen, “largely reflecting transitory factors”

• 2)The statement rephrased its assessment of the economic progress as follows: “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened”

• 3)It noted that while sectors most adversely affected by the pandemic remained weak, they had “shown improvement”

• 4)March’s statement that the public health crisis would weigh on economic activity, employment and inflation, posing considerable risks was recalibrated as well. It now noted more generally that “the ongoing public health crisis continue[d] to weigh on the economy, and risks to the economic outlook remain[ed].” Aside from these small changes/additions reflecting a modestly more optimistic outlook, there were no other changes to the policy statement

• In the press conference following the announcement, FOMC Chairman Jerome Powell reiterated that it was not yet time for tapering, arguing as he had for months that “substantial further progress” was needed before then. On inflation, he stressed the transitory nature of above-2% inflation readings for March and the coming months. He explained that these largely reflected base-year effects and supply bottlenecks that they expected would resolve in time. In response to questions regarded reported labour shortages, Powell cited a number of explanations including skill mismatches, geographical factors, virus fears, and school closures keeping parents at home. In his view, ongoing vaccination and better control over the public health situation should help the labour supply expand

• Before a joint session of Congress, US President Joe Biden unveiled a $1.8 trillion spending plan designed to bolster education and childcare and to provide paid family leave. Biden wants to pay for part of the new spending through a hike in the capital gains and dividends tax on those earning more than $1 million annually from 20% to 43.4%, including a Medicare surcharge for high earners. The top income tax rate would rise to 39.6% from 37%. Biden this week rejected an alternative infrastructure plan offered by Republican lawmakers that was smaller and more-targeted than his own. Democratic Senator Joe Manchin of West Virginia, a pivotal vote in an evenly divided Senate said this week that he is uncomfortable with cost of the White House’s American Families Plan and voiced skepticism over some of its provisions

• The major indexes ended mostly lower, but the S&P 500, the Nasdaq Composite, and the S&P Mid Cap indexes all reached new highs before surrendering their gains on Friday. Returns within and among sectors varied widely as investors reacted to a flood of first-quarter earnings reports, although a rise in oil prices to six-week highs provided a general boost to energy stocks. Communication services shares outperformed within the S&P 500, helped by earnings and revenue beats from Facebook and Alphabet (Google). Technology stocks underperformed, weighed down by a decline in Microsoft despite the company reporting earnings that exceeded consensus estimates. Health care shares were also weak, dragged lower by declines in several major drugmakers

• In terms of data release, the most important piece of news will be April’s non-farm payrolls. Hiring should have remained solid in the month as the improving epidemiological situation allowed the re-opening of broad swathes of the economy. Layoffs, meanwhile, could have gone down, judging from the decrease in initial jobless claims between the March and April reference periods

• The ISM manufacturing index is out on Wednesday. The index soared to a 64.7 reading in March, the highest since 1983. Most sub-indices improved sharply during the month, notably the production and new orders components. Sentiment in the factory sector has been boosted by robust consumer demand generated by multiple rounds of fiscal stimulus. That said, ongoing supply chain constraints remain a significant challenge for many producers, who are still working through delays caused by February’s adverse weather and the recent blockage of the Suez Canal. Manufacturing firms also continue to report fast-rising raw material prices as well as shortages of labor due to health concerns and childcare issues. Still, most regional surveys of manufacturing activity bested expectations during the month, which points to another solid rise in the ISM manufacturing index for April


• Company insolvencies in England and Wales fell to their lowest level in more than 30 years during the first three months of this year, as government support measures helped businesses hit by the coronavirus pandemic to ward off bankruptcy. Britain suffered its sharpest fall in economic output in more than 300 years last year, but government-backed lending schemes enabled firms to borrow more than 75 billion pounds to bridge a shortfall in cashflow. The number of businesses which were declared insolvent sank to 2,384 in the first quarter of 2021 from 3,053 in the final three months of 2020, the lowest number in seasonally adjusted data that goes back to the first quarter of 2011. Longer-running figures which are not seasonally adjusted show the lowest number of insolvencies since the third quarter of 1989, according to official data from The Insolvency Service, a government agency

• British house prices jumped by 2.1% in April, their biggest monthly rise in more than 17 years, after finance minister Rishi Sunak unexpectedly extended a tax break on property sales, mortgage lender Nationwide said on Friday. House prices are now 7.1% above their level last April, a growth rate which is just shy of the six-year high of 7.3% recorded in December, as COVID-19 lockdowns and increased home-working continue to boost demand for more spacious housing. “Just as expectations of the end of the stamp duty holiday led to a slowdown in house price growth in March, so the extension of the stamp duty holiday in the Budget prompted a reacceleration in April,” Nationwide chief economist Robert Gardner said

• London’s FTSE 100 closed flat on Thursday after hitting a one-week high hours earlier as a wave of positive corporate earnings from companies including Standard Chartered and Unilever helped the blue-chip index outperform its European peers. The index (.FTSE) retreated after rising as much as 0.8% to 7,019.71 points during the session, with Standard Chartered (STAN.L) gaining about 5.6% after posting a stronger than expected first-quarter profit. Lender NatWest (NWG.L) returned to profit in the first quarter of 2021, joining rivals in releasing some of the cash it had set aside to cover expected bad loans. Its shares, however, fell 3.4%. “These similar patterns in two of the UK’s biggest banks show that they appear to support the argument that UK consumers have been holding back,” said Michael Hewson, Chief Market Analyst at CMC Markets


• Flash estimates for GDP in the eurozone in the first quarter of 2021 showed a smaller-than-expected contraction of -0.6 % QoQ, compared to -0.7 % the previous quarter. The corresponding YoY growth rate was -1.8 %, compared to -4.9 % in the earlier period. Country-specific estimates for France, Germany, Italy, and Spain were 0.4, -1.7, -0.4 and -0.5 % QoQ respectively. Whereas the releases for France and Italy were better than expected, Germany’s economy contracted more than – and Spain’s in line with – expectations. Household consumption suffered in Germany, whereas domestic demand made positive contributions in Italy and France respectively.

• The April flash annual consumer price index was 1.6 %, compared to 1.3 % the previous month, whereas core inflation was 0.8 YoY compared to 0.9 % last month. Both were in line with expectations. Across the main categories, energy is expected to have the highest annual rate in April (10.3%, compared with 4.3% in March), followed by services (0.9%, compared with 1.3% in March), food, alcohol & tobacco (0.7%, compared with 1.1% in March) and non-energy industrial goods (0.5%, compared with 0.3% in March). Unemployment declined to 8.1 % in April, and below expectations, compared to a revised 8.2 % the previous month. The youth unemployment rate was 17.2% in the euro area, down from 17.3% the previous month

• The European Commission’s Economic Sentiment Index improved markedly in April, rising from 100.9 to a 32-month high of 110.3. This was significantly above the 102.2 reading expected by consensus and higher than the pre-recession peak for this indicator (10.4.0 in 2020 M02). Confidence rose in all five sectors surveyed: manufacturing (from 2.1 to an all-time high of 10.7), services (from -9.6 to 2.1), consumers (from -10.8 to -8.1), retail (from -12.2 to -3.1), and construction (from -2.3 to 2.9). At the national level, confidence improved in Germany (from 103.7 to 109.4), France (from 96.2 to 104.7), Italy (from 99.5 to 104.8), and Spain (from 96.9 to 106.0). The progressive re-opening of the economy and ramping up of the vaccination campaign should help lift sentiment further

• In Germany, the Green Party is likely to be king-makers in any future governing coalition, opening up the potential for a more relaxed fiscal stance down the line. However, the debt brake will still limit expansionary fiscal policies

• European shares ended little changed after an increase in eurozone bond yields prompted investors to take profits at near record levels. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.38% lower. The major indexes posted mixed results: Germany’s Xetra DAX Index eased 0.94% and Italy’s FTSE MIB slipped 1.00%, while France’s CAC 40 advanced 0.18%


• China reportedly suspended some import tariffs on steel products as part of a campaign to shrink domestic production and increase energy efficiency. Import duties on crude steel, pig iron, recycled steel, and some other products will temporarily be lifted from May, according to China’s Customs Tariff Commission. However, the move is not expected to have a big impact on the steel sector in China, the world’s lowest-cost steel producer

• Chinese shares recorded a weekly loss as the government’s continued crackdown on technology firms’ dampened buying sentiment. The large-cap CSI 300 Index declined 0.2%, while the Shanghai Composite Index shed 0.8%. Slightly weaker-than-expected Purchasing Managers’ Index readings for April disappointed investors. Additionally, reports that a state-owned asset manager was selling positions in growth stocks and that several state banks were delaying the release of their 2020 financial results gave investors little incentive to buy ahead of a three-day Labor Day holiday

• China’s tech sector remained under a regulatory cloud after Beijing imposed wide-ranging restrictions on the financial divisions at 13 well-known internet companies, including Tencent and TikTok developer ByteDance. The move marked the latest in a crackdown on the country’s online giants. Online retailer, e-commerce platform Meituan, and ride-hailing company Didi were also summoned to a meeting with several of the country’s watchdogs, including the central bank. E-commerce leader Alibaba, an early target of the government crackdown, was not included as the company already completed talks regarding Ant Group, its fintech division

Sources: T. Rowe Price, Reuters, National Bank of Canada, MFS Investment Management, Wells Fargo, Handelsbanken Capital Markets, M. Cassar Derjavets