Weekly Economic Report
There was another deluge of big numbers this week – all signaling that the economy is currently booming. However, on the spending side, that boom was driven by unprecedented stimulus – which is now largely in the rear-view mirror. On the production side, incredibly strong demand combined with supply chain disruptions has limited the ability of firms to answer. In the first quarter, it now appears that retail sales grew at a 35% annual rate – roughly half of the gain in the booming third quarter of 2020. However, industrial production for manufacturing in the first quarter grew at only a 2.5% annual rate, as bottlenecks and a slow recovery from the storms in February limited the factory response. In the second quarter, the one-time money drops will fade and in the third quarter they will disappear – unless new legislation is passed. That will give manufacturers an opportunity to catch up – but what level of demand will they target? Bottom line, from current levels, income growth will be very slow. New jobs, however plentiful, will not produce much new income as unemployment benefits will come off almost as fast as wages and salaries rise. However, if jobs lag, expectations are high that income support via unemployment benefits will be extended, so firms are unlikely to worry about a fiscal cliff. This suggests that the first quarter growth may be a bit disappointing, with a substantial inventory drawdown offsetting consumer strength – followed by very strong growth in the second quarter as manufacturers catch up. The big question is the third quarter and beyond, as economic activity normalizes. We expect growth will slow far more quickly than an extremely optimistic consensus is currently pricing in – though still above the pre-COVID 2% trend in late 2021. The outlook for 2022 is far more uncertain as it will depend significantly on success against the virus and political choices on new stimulus heading into the mid-term election. We will leave worrying about 2022 until we are clearer on late 2021. We expect that is precisely the stance being adopted by both policymakers and business leaders – all of whom are guessing about what the others will do. The uneven recovery outside the US only complicates the picture further.