Heating up: U.S. economic growth sizzles in strong first quarter
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Senior Research Analyst Brian Yadao discussed U.S. first–quarter GDP (gross domestic product) growth and key takeaways from the recent U.S. Federal Reserve (the Fed) meeting. They also provided an update on first–quarter earnings season results from Europe.
Fiscal stimulus, vaccine rollout supercharge U.S. Q1 growth
On April 29, the U.S. Commerce Department reported that GDP grew at a 6.4% annualized rate during the first quarter of the year—a number Ristuben characterized as very strong. “6.4% is a very meaningful increase in economic activity,” he remarked, adding that the acceleration was fueled by what markets had been anticipating: an uptick in personal consumption expenditures, including durable goods, non–durable goods and services.
The boost in GDP serves as a confirmation that COVID–19 vaccines and large amounts of fiscal stimulus are improving the U.S. economy as intended, Ristuben said. “Ever since Pfizer’s Nov. 9 announcement on the efficacy of its vaccine, markets have been hoping that the administration of vaccines would lead to a broader reopening of the economy, which in turn would lead to a notable increase in overall economic activity. This belief was bolstered further by the passage of the US$1.9 trillion stimulus bill in March, as well as the US$900 billion package approved by Congress last December,” he added.
The aid to American households over the winter led to a stockpile of cash for the U.S. consumer as a whole—a stockpile that consumers are now beginning to spend from, Ristuben said. The strong growth in GDP reflects this, he said, noting that markets didn’t move much in response to the report because it was already expected. “Essentially, the market has gone from hoping the narrative of an economic recovery would play out, to seeing preliminary data supporting this idea, to now finally having concrete data confirming that a rebound is well underway,” he stated.
Fed leaves ultra–accommodative policies unchanged
Turning to the Fed, Ristuben noted that the central bank left its easy–money policy in place at the conclusion of its two–day meeting on April 28. Markets were expecting this, he said, as Fed Chair Jerome Powell has repeatedly emphasized that the central bank won’t begin considering changes until inflation is averaging 2% over a longer period of time and full employment has been reached.
“The Fed did note in its statement that the economy has strengthened, but also pointed out how the recovery has been uneven and remains far from complete,” Ristuben said. He added that the central bank noted that inflation has also risen—primarily due to transitory factors.
“The Fed doesn’t see inflation as a problem in the short–term, and I think that’s the correct view,” he said. Ristuben explained that a fair amount of the expected pick–up in inflation over the next few months will likely be due to the base effect—the term used to describe distortions in inflation data when current numbers are compared to extremely low (or high) numbers from the prior year. Because inflation was all but non–existent last spring due to coronavirus–induced shutdowns, inflation reports from the next few months are likely to be skewed, Ristuben said, and therefore not necessarily indicative of increasing price pressures.
“Massive amounts of stimulus and really strong economic growth typically do lead to inflation, but right now, there’s still a fair amount of slack in the economy—especially in the labor market,” he stated. The nation’s unemployment rate, for instance, is still 2.5% above where it stood before the onset of the pandemic, Ristuben said, adding that there are 8.4 million fewer jobs today than in February 2020. Because of this, he believes inflation is unlikely to become a problem until at least next year.
European earnings soar
Switching to Europe, Ristuben said that first–quarter corporate earnings for STOXX® Europe 600 companies have been very strong. “So far, with a little less than half of all companies reporting, roughly 75% of STOXX 600 companies are beating growth expectations, marking a dramatic recovery from a year ago,” he remarked.
The strong corporate earnings are at odds with the region’s first–quarter GDP, which contracted by 0.6% on a quarter–over–quarter basis due to the reimposition of lockdowns. However, Ristuben noted that the eurozone economy gained momentum near the end of the first quarter, as evidenced by a blowout manufacturing PMI (purchasing managers’ index) reading of 62.5 in March. A number above 50 indicates expansionary conditions, and a number below 50 indicates contractionary conditions.
Much of Europe is an export–based economy, he said, meaning that when large economies such as the U.S. experience strong growth, European manufacturing generally benefits. “These strong manufacturing numbers may take a while to flow through into GDP numbers, which explains some of the discrepancy between the recent GDP report and corporate earnings,” Ristuben noted. Overall, European corporate earnings are tracking in a very similar fashion to the U.S., and are simply outstanding, he concluded.