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    U.S. Economic Growth Expected To Accelerate In Q2

    Abstract:U.S. Economic Growth Expected To Accelerate In Q2
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      The US economic rebound picked up speed in the first quarter and even faster growth is expected for the April-through-June period, according to a set of GDP nowcasts.

      Economic activity in 2021s second quarter is on track to ramp up to a sizzling 10.5% increase in gross domestic product (real annual rate), based on the median nowcast for several estimates compiled by CapitalSpectator.com. That compares with the already strong 6.4% gain in Q1.

    US

      US Real GDP Change For Q2 - 2021

      Its still early in current quarter and so the current Q2 nowcast should be viewed cautiously. A lot can happen between today and the end of July, when the Bureau of Economic Analysis publishes its preliminary estimate of GDP for Q2. For the moment, however, early estimates for growth point to an acceleration in economic rebound.

      PMI survey data echoes the upbeat outlook for Q2. The IHS Markit Composite PMI Output Index, a proxy for GDP, rose sharply in April, reflecting the biggest upgrade in private-sector output in the history of this data set, which dates to 2007.

    IHS

      IHS Markit US PMI

      “Thanks to the cocktail of a successful vaccine roll-out, the reopening of the economy, ultra-accommodative monetary policy and injection of fresh fiscal stimulus, businesses are reporting the strongest surge in demand seen for at least a decade,” says Chris Williamson, chief business economist at IHS Markit. “The upswing in demand has led to one of the strongest months of job creation yet recorded by the survey as business prepares for better times ahead.”

      A key reason for the improving outlook for growth: higher consumer spending, which was a leading factor in Q1‘s stronger growth. Personal consumption expenditures rose sharply in the first quarter of the year, jumping 10.7%, dramatically above Q4’s 2.3% increase, the Bureau of Economic Analysis reports.

      “Consumers are now back in the driver‘s seat when it comes to economic activity, and that’s the way we like it,” says Gregory Daco, chief US economist at Oxford Economics. “A consumer that is feeling confident about the outlook will generally spend more freely.”

      What could go wrong? The main risk (still) is the pandemic. The worst-case scenario: a new variant emerges thats immune to the current crop of vaccines. But this appears to be a low-probability scenario to date. For example, recent studies advise that the Pfizer (NYSE:PFE)/BioNTech's (NASDAQ:BNTX) vaccine shows encouraging results in protecting against variants.

      Meantime, the daily changes for new Covid-19 cases and fatalities in the US continue to trend down, suggesting that pandemic risk remains on track to fade through the summer.

    US

      US Daily Covid Deaths

      The main worry is that the rapid recovery in economic activity, spurred by hefty stimulus from the federal government, will unleash higher and sustained inflation. Thats still debatable, but for the short term, at least, higher inflation is widely expected to bump higher. If inflation turns out to be more pervasive than expected, interest rates may continue to rise, a possibility that Treasury Secretary Janet Yellen mentioned earlier this week.

      “It may be that interest rates will have to rise somewhat to make sure that our economy doesnt overheat,” Yellen said. “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”

      The 10-year Treasury yield has already recovered most of its pandemic-related decline and is currently just below 1.6%. But this benchmark rate has stabilized over the past month and so its unclear if even higher rates are coming.

    UST10Y

      UST10Y Daily Chart

      For the moment, the economy is enjoying the best of all worlds: faster growth and relatively low interest rates. The question is whether faster inflation will be a party spoiler by rising more than expected and lasting longer than the Federal Reserve anticipates.

      Richmond Federal Reserve President Thomas Barkin, for example, says the likely runup in inflation in the months ahead will be a temporary affair.

      “I think we will see price pressure this year. You‘ve got a very strong demand situation, and you’ve got constraints in supply,” he said recently. “When those things happen, youre definitely going to see price pressure.”

      The mystery is whether were at the start of a substantially higher inflation regime or just a fleeting runup that fades. Hanging in the balance is the health and staying power of the economic rebound.

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