Monthly Economic Review: April 2021

2021 April MER

Economic Outlook Much Stronger After ‘Unimaginable’ Year

The past 12 months have been unimaginable. In March 2020, the unpredictable shock of the coronavirus pandemic brought about an unprecedented shutdown of the U.S. economy. All but essential activity closed as the country underwent a vast social-distancing process to limit the spread of the virus, with social mitigation policies put in place at the federal, state and local levels.

During last year’s second quarter, real output deceased at an annual rate of approximately 31 percent. In the two months of March and April, payroll jobs dropped by 22 million – roughly the number of jobs the economy had added over the entire 10-year expansion prior to that time. The unemployment rate, which had been at a 50-year low of 3.5 percent in February 2020, spiked to 14.7 percent in April.

The economy has come a long way compared with a year ago. Both monetary policy set by the Federal Reserve and fiscal policy set by Congress and the White House have responded with swift and overwhelming force to support the economy. Real gross domestic product increased in all 50 states and the District of Columbia in the fourth quarter of 2020 and rose at an annual rate of 4.3 percent for the nation, according to the U.S. Bureau of Economic Analysis. At $21.5 trillion, U.S. GDP in the fourth quarter was strong by pre-pandemic standards even though it was down 2.4 percent from the same time the year before. While the pandemic drove a 3.5 percent contraction in economic growth in 2020, growth is expected to bounce back considerably in 2021. The Federal Reserve has acknowledged a stronger path, upgrading its median growth forecast for 2021 to 6.5 percent in March from 4.2 percent in December. There is no doubt the substantial boost from the recently approved $1.9 trillion American Rescue Plan Act entered into this revision.

With multiple highly effective vaccines firmly in place, the economic outlook is much stronger than even a few months ago. NRF is optimistic that the recovery is accelerating and that the needed rebuilding of the economy is underway. The rate of vaccinations is ramping up and the numbers paint an increasingly encouraging picture, with 70 percent of Americans 65 and older having received at least one dose and COVID-19 deaths down significantly from recent peaks in January and February. Millions more are being vaccinated each day.

While overall economic conditions have improved dramatically from a year ago, the labor market continues to reflect the impact of the pandemic, with the recovery in jobs remaining soft despite recent gains. February employment increased by 379,000 jobs, more strongly than expected, while the unemployment rate edged down to 6.2 percent from 6.3 percent. Most of the job gains occurred in leisure and hospitality, with smaller increases in temporary help services, health care and social assistance, retail and manufacturing. Employment declined in state and local government education, construction and mining.

Households finished 2020 in a very healthy state, according to the Fed. Household net worth – the value of total assets less liabilities – increased to a record $122.9 trillion in the fourth quarter from $116.2 trillion in the third quarter and $111.4 trillion at the end of 2019. The jump came from gains in both savings – which accumulated as consumers stayed home rather than eating out, traveling or attending sports and entertainment events – and home values. This provides consumers with plenty of purchasing power that we expect to see put to use across consumer industries. These include but are not limited to groceries and household products, home improvement purchases and technology products. At the same time, a rebound in consumer-facing services should be evident. Nonetheless, the economic recovery has been uneven. Around 10 million people remain without jobs and the downturn has disproportionately impacted low-income workers and members of minority communities, many of whom are struggling to pay their rent.

With the passage of the American Rescue Plan, increased consumer spending is expected as the legislation’s $1,400 stimulus checks fuel another leg of growth. There is no precision, however, on where these payments will land in the economy. Recent findings vary but U.S. households spent on average roughly 35-45 percent of their 2020 stimulus checks on goods and services, with about 30-35 percent saved and 25-30 percent used to pay down debt.

As reopening progresses, are the risks for inflation substantial? This is an unsettled question. We are indeed seeing certain goods and services jumping all over the place, with the sharp acceleration in spending leading to higher prices for at-home food and used cars, for example. The Fed sees these inflationary pressures as transitory, but others expect overall prices to rise and force the Fed to raise interest rates sooner than projected. I side with the Fed: There will be some significant year-over-year price gains over the next few months coming off last year’s pandemic-induced lows, but higher prices are unlikely to be sustained as supply catches up with demand. Moreover, there is excess capacity in the labor market, which is keeping wages in check, and the ongoing popularity of highly competitive ecommerce is significantly limiting sellers’ pricing power. We will be closely monitoring inflation and inflation expectations to determine if we need to make any changes to our outlook on pricing.

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