This and That

Chief Economist Scott Brown discusses current economic conditions.

The Bureau of Economic Analysis will report the advance estimate of 1Q21 GDP growth on April 28, the day after the Federal Open Market Committee meeting. There’s always a lot of uncertainty heading into the initial GDP estimate. We don’t have all the pieces of the puzzle. Recent economic data reports have generally been stronger than expected, which is encouraging, but the first quarter figures may not tell us much about what lies ahead.

Recall that the year began with a huge surge in COVID-19 cases. We were averaging around 250,000 per day. Following a sharp, but partial, rebound in 3Q20, growth moderated considerably in 4Q20. Real GDP rose at a 4.3% annual rate, which would normally be pretty good, but that followed a 33.4% pace in the third quarter, leaving us 4.1% below the level of 4Q19. The holiday shopping season was relatively lackluster. Retail sales rose at a 0.9% annual rate (4Q20/3Q20), following sharp improvement in in the previous quarter (boosted partly by the fact that the ability to spending on consumer services was limited). Still, 4Q20 retail sales were up 3.8% y/y (vs. +4.1% y/y in 3Q20). The vaccine news was good in late 2020, but the surge in COVID-19 cases cast doubt on the strength of consumer spending into the early 2021. In contrast, consumer spending in the first three months of the year was surprisingly strong

Weather added noise to the monthly data. January and March were milder than usual, while February was exceptionally bad. Retail sales were strong for the quarter as a whole – a 34.7% annual rate (relative to 4Q20) and up 14.3% from 1Q20.

Fiscal policy played a key role, with $600 checks going out in January and another $1400 in mid-March. However, we won’t see checks going out again and much if the first quarter strength in retail sales should moderate without such support. However, with a growing number of people vaccinated, consumer services should continue to rebound, more than making up the difference. It’s likely that we’ll find the consumer spending on durables will have been pulled forward to some extent.

While consumer spending growth was strong in the first quarter, other sectors faced some headwinds. Manufacturing did not fall as much as consumer spending did a year ago. Despite a 5.0% drop in manufacturing in March 2020, factory output was still down 0.6% y/y in March 2021. Bad weather weakened manufacturing and construction activity in February, but March failed to make up the difference. Supply chain issues, exacerbated by the pandemic, have continued, preventing stronger gains in manufacturing. Builders continue to report higher input costs and a lack of skilled labor. The Fed’s Beige Book of anecdotal conditions highlighted these issues. Despite widespread supply chain disruptions, manufacturing activity “expanded further with half the Fed districts citing robust growth.” The pace of job growth “varied by industry but was generally strongest in manufacturing, construction, and leisure and hospitality.” However, “hiring remained a widespread challenge, particularly for low-wage or hourly workers, restraining job growth in some cases.” Absenteeism due to COVID-19 has been a problem throughout the pandemic, but the Beige Book noted that this was down more recently. Wage growth “accelerated slightly overall,” according to the Beige Book, “with more significant wage pressures in industries like manufacturing and construction where finding and retaining workers was particularly difficult.” Some of the Fed’s contacts mentioned raising starting pay and offering signing bonuses to attract and retain employees.

Matching unemployed workers to available jobs is likely to be a significant challenge as the economy opens up. Labor and other input costs are rising, “especially in the manufacturing, construction, retail, and transportation sectors—specifically, metals, lumber, food, and fuel prices.” Cost increases were partly attributed to supply chain disruptions, (temporarily) made worse by February’s bad weather. The Beige Book noted “widespread reports of increased selling prices also, but typically not on pace with rising costs.”