The past three months have unfolded in generally a positive fashion. The winter surge has ended, and rapid expansion of vaccination has occurred. As we expected the economic restart produced solid growth in Q1, which we expect to continue for the rest of 2021. But all is not sunshine, lollipops and rainbows, as evidenced by a weak April jobs number.
The initial release of first-quarter data was overall as we expected three months ago, but that accuracy was partly due to offsetting errors at the sectoral level.
The headline number for real GDP growth was 6.4%, just slightly below our February forecast of 6.6%. Our estimate for consumer spending was significantly too low, due entirely to enormously strong purchases of goods. On the other hand, we were too optimistic in our estimates for investment, both by business and on housing. However, while Q1 investment growth was below our February forecast, excepting business structures, it was still was quite strong. Government purchases were stronger than we expected, mainly from a huge surge in federal non-defense spending. Internationally, exports fell by 1.1%, while import growth was weaker than we anticipated. This resulted in a net export balance close to our forecast.
Finally, and quantitatively most significant, inventories had a huge negative impact on the quarter. This can be seen in the 9.2% growth in final sales (which excludes inventory change). Inventory shrinkage is an indication that aggregate demand is exceeding aggregate supply, which is often a precursor to future growth in output, both to meet demand and to rebuild inventories. In the present situation, we are not so sure.
From a longer perspective, looking over the past four quarters, the economy had positive 0.4% growth, after three quarters of year-over-year declines. The quarter was, however, still below the 2019Q4 pre-pandemic peak.
Our May 2020 forecast was quite accurate for overall output and for consumer spending. However, we were far too pessimistic about investment and too optimistic about the trade deficit. Government expenditures were also above our year-ago forecast, due mostly to the surge in Q1. Finally, again, inventories were a negative that we didn’t foresee.
In summary: The first quarter numbers were pretty good. And they were generally in line with our expectations.
Monthly data during April (for March and April) were mostly positive, with one large exception. Starting with new data for March, bearing in mind that bad weather had a significant negative impact on February numbers: (1) Real consumption and income both had large gains after decreasing in February. For income the swing was due mainly to transfer payments – decline in February due to the absence of the final round of Trump administration COVID payments; super surge in April from about $400 billion in Biden administration payments. Consumption was partly a bounce from weather reduced spending in February but also from the large rise in government transfers. The consumption increase, which was strongest for durable goods, is carrying over into Q2. Auto and light truck sales in April were at an 18.5 million annual rate, the sixth best month on record going back to 1976. (2) Housing starts in March (after a weather weakened February) came in at their highest level since early 2006. Over the past six months starts are up at annual rate of 46%. (3) On the business side, industrial production erased some, but not all of its February decline. March new orders for manufactured goods were higher by more than enough to offset a decline in the previous month. At an annual rate orders are up 16% over the past six months. (4) On the same basis nonresidental construction spending has decreased at a 7% rate. There was no sign in March of a chenge in this trend.
Turning to indicators with new data for April: Consumer sentiment improved, both overall and in terms of expectations. On the business side, however, the ISM indexes both decreased – manufacturing by 4 points, services by 1 point. Both remain above 60, however, indicating an outlook for strong expansion.
Finally, the April employment report was a mixed bag. The household survey showed a two tick rise in the unemployment to 6.2% – a disappointment. But there was a nice increase in the labor force (430 thousand), which raised the participation rate to 61.7. That is still 1.7 points below the pre-pandemic level, but it is 1.5 points up from the shutdown low. The household survey measure of employment rose 328 thousand. The employment-population rate increased a tick to 57.9 – still off 3.2 points from the pre-pandemic level, but up 6.6 points form the shutdown low.
The bad news for the month was in the establishment survey, which had a total employment increase of just 266 thousand. The previous three months, as the economy emerged from winter surge shutdowns, had seen accelerating job gains – 233k to 536k to 770k. The expectation for April was upwards of 1 million. The only sector with a noticeably better gain than in March was leisure and hospitality, but even here the gain was below February.
Overall, mostly good news, but with a labor market report that raises at least some concerns about the outlook.