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Q121 GDP Up 6.4% annually and Fed Steady on Interest Rates and Quantitative Easing
Due to the rollout of vaccines, fewer restrictions on business activity, and massive government stimulus, real GDP surged in the first quarter. . Real GDP rose at a 6.4% annual rate in Q1, close to consensus expectations, with consumer spending accounting for the leading share of that growth. Even faster growth is expected in the second quarter Consumer spending on durable goods rose at a 41.4% annual rate, with purchases of motor vehicles and parts up at a 51.5% rate, in spite of supply-chain issues like a lack of semiconductors holding back supply. Meanwhile, businesses ramped up investment in equipment, which rose at a 16.7% annual rate and which should help spur future growth in productivity. Home building was another strong sector, with residential construction up at a 10.8% annual rate. The largest drags on real GDP growth in Q1 were inventories and net exports. Inventories fell as businesses with supply-chain issues met increased demand by lightening up on goods on their shelves and showrooms.
The Fed maintained interest rates today and economist expect the Fed to keep interest rates steady thru the end of next year (and the March dot plots show the Fed's own forecasts have them on hold through 2023). But there are actions – such as tapering asset purchases – that are likely to come before rates lift off. And indeed, this was the first question out of the gate as the Q&A portion of Chair Powell's press conference began. In response, the Chairman stated that the Fed is not even "talking about talking about tapering," before elaborating on a few of the reasons the Fed expects to be on pause for the foreseeable future.
The Fed wants to see a string of strength in job creation. While the March gains were strong, it was only one month, and nonfarm payrolls remain down more than 8.4 million from pre-COVID levels. Even with record employment growth in 2021, the employment market is likely to remain below pre-COVID levels for a while. The economy is not a light switch, and when things were shut down last year, it caused lasting damage. Hundreds of thousands of companies closed their doors, and it will take time for jobs to get back to where they were. With damage concentrated among low-income jobs, the employment mandate is likely to be the key factor keeping policy accommodative for a while. In the short term, Chairman Powell said, inflation is being pushed higher for two reasons: 1) base effects, meaning that readings will run high in the short-term simply due to the low levels we are coming off of, and 2) supply chain bottlenecks, which the Fed expects will be resolved as companies and workers get back towards normal. In effect, the Fed puts little weight on the above. The Fed continues to purchase Treasury securities at a pace of $80 billion per month, and agency mortgage-back securities at a pace of $40 billion monthly as it remains incredibly accommodative. Expect faster economic growth (and positive backdrop for equities), but the risk of too loose for too long is rising.
Due to the rollout of vaccines, fewer restrictions on business activity, and massive government stimulus, real GDP surged in the first quarter. . Real GDP rose at a 6.4% annual rate in Q1, close to consensus expectations, with consumer spending accounting for the leading share of that growth. Even faster growth is expected in the second quarter Consumer spending on durable goods rose at a 41.4% annual rate, with purchases of motor vehicles and parts up at a 51.5% rate, in spite of supply-chain issues like a lack of semiconductors holding back supply. Meanwhile, businesses ramped up investment in equipment, which rose at a 16.7% annual rate and which should help spur future growth in productivity. Home building was another strong sector, with residential construction up at a 10.8% annual rate. The largest drags on real GDP growth in Q1 were inventories and net exports. Inventories fell as businesses with supply-chain issues met increased demand by lightening up on goods on their shelves and showrooms.
The Fed maintained interest rates today and economist expect the Fed to keep interest rates steady thru the end of next year (and the March dot plots show the Fed's own forecasts have them on hold through 2023). But there are actions – such as tapering asset purchases – that are likely to come before rates lift off. And indeed, this was the first question out of the gate as the Q&A portion of Chair Powell's press conference began. In response, the Chairman stated that the Fed is not even "talking about talking about tapering," before elaborating on a few of the reasons the Fed expects to be on pause for the foreseeable future.
The Fed wants to see a string of strength in job creation. While the March gains were strong, it was only one month, and nonfarm payrolls remain down more than 8.4 million from pre-COVID levels. Even with record employment growth in 2021, the employment market is likely to remain below pre-COVID levels for a while. The economy is not a light switch, and when things were shut down last year, it caused lasting damage. Hundreds of thousands of companies closed their doors, and it will take time for jobs to get back to where they were. With damage concentrated among low-income jobs, the employment mandate is likely to be the key factor keeping policy accommodative for a while. In the short term, Chairman Powell said, inflation is being pushed higher for two reasons: 1) base effects, meaning that readings will run high in the short-term simply due to the low levels we are coming off of, and 2) supply chain bottlenecks, which the Fed expects will be resolved as companies and workers get back towards normal. In effect, the Fed puts little weight on the above. The Fed continues to purchase Treasury securities at a pace of $80 billion per month, and agency mortgage-back securities at a pace of $40 billion monthly as it remains incredibly accommodative. Expect faster economic growth (and positive backdrop for equities), but the risk of too loose for too long is rising.
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