Overstimulation on the Way

Things are looking up for the US economy.

Later this week we'll get an update on real GDP growth for the 4th quarter of 2020. We estimate that'll be revised up to a 4.3% annual rate of growth from a prior estimate of 4.0%.

Meanwhile, 2021 got off to a roaring start. Retail sales soared 5.3% in January and are now up 7.4% from a year ago (pre-COVID). All major categories of sales rose in January, reflecting stimulus spending approved in late December and less onerous lockdowns of business.

But it wasn't just the demand side of the economy picking up in January. Industrial production increased 0.9% and was revised up for prior months. More importantly, the gain in industrial production was led by manufacturing excluding the auto sector, which is what we think of as "core" industrial production – it increased 1.1% in January. That measure of production has now increased nine months in a row.

Other positive news on the manufacturing front was an increase in the Empire State index to 12.1 from 3.5, and the Philadelphia Fed index coming in at a very robust 23.1. it's good to see the northeastern US continue its revival.

It's true that housing starts declined in January and fell short of consensus expectations. But those figures are volatile from month to month, and a better measure of how much residential construction is happening every month is the total number of homes under construction, which increased 0.6%.

Putting this all together, we're now estimating that real GDP will rise at about a 6.0% annual rate in the first quarter, and grow about 5.0% (Q4/Q4) in 2021. Yes, we know that the Atlanta Fed's GDP Now model projects a 9.5% growth rate for Q1, but that model has been overestimating growth since the recovery started and doesn't factor-in the polar vortex that has wreaked havoc throughout much of the mid-section of the country in February.