Global and U.S. Economic Commentary

Global and U.S. Economic Commentary

Global economic growth is accelerating and projected to reach 6.1%, and 7.2% in the United States in 2021. Recovery is being fueled by massive fiscal and monetary policy support. With the vaccination rollout gaining pace unleashing trillions of dollars in economic activity.



Global economic growth is accelerating and projected to reach 6.1%, and 7.2% in the United States in 2021. Recovery is being fueled by massive fiscal and monetary policy support. With the vaccination rollout gaining pace unleashing trillions of dollars in economic activity, I expect economic growth will be more than triple the pre-pandemic year-over-year growth rate and the fastest pace since 1984.

Manufacturing activity is surging, despite shortages. The ISM Manufacturing Index shot up its highest level since December 1983. The V-shaped factory activity is gaining momentum as lockdowns end. Historically, current ISM readings have been consistent with above-trend growth in both manufacturing output, demand for services, and the broad economy.

Inflation for March showed a pick-up of 2.6% year-over-year. A 9.1% jump in gasoline prices contributed to the gain. Some of the gains in inflation this spring are expected to be temporary because of the comparison to extremely low levels last year when the economy was shutdown. Even so above average global growth suggests higher commodity prices ahead and inflation.

The Fed is on hold until it achieves its inflation and employment targets. The Fed believes its “outcome” strategy is the right one because inflation will prove to be transitory. There is greater risk of a policy error with this approach. I think economic growth and increased velocity in money supply should push inflation towards three percent which would drive the 10-Year Treasury Yield towards 2.5%. Delaying tightening in a hot economy is supportive of spending and higher stock prices unless the stock market fears runaway inflation. Treasury Inflation Protected bonds are implying that inflation will be transitory as chairman Powell asserts.

The personal saving rate is at 13.6%, close to its highest level since 1975. Consumers have $2 trillion in more cash in their checking accounts than they had before Covid. They are paying down their credit card loans; household debt and finances are in excellent shape. Expect a boom in spending this year. Economy is already seeing it. Headline retail sales surged 9.8% in March which was a full four percentage points more than forecasts. Furthermore, consumer sentiment index rose to the highest level in a year. The increase in sentiment is important, as it may translated into faster consumer spending growth in the near-term

There is a strong and broad-based jobs recovery in the works. First-time claims for unemployment insurance fell to a pandemic-era low in April. Job openings increased to highest level in more than two years. Job gains may soon be averaging one million a month. Still, there are about 8 million fewer Americans are at work than before Covid. Unemployment is still 2.5 percentage points over the 3.5% pre-pandemic unemployment rate in February 2020. Generous unemployment benefits are propping up unemployment rate. Some 17.4 million Americans are opting for benefits.

The federal budget deficit hit a record high in April. Tax hikes are coming in 2022, which may include the following: a top rate back up to 39.6%; a corporate rate, now 21%, closer to 28%; a top rate on capital gains and dividends at about 24-43.4% versus the current 20%; a lower exemption for the estate tax. It is not clear which parts will become law and by how much. It will not be easy to enact extreme tax hikes because Republicans will resist and so will a few centrist Democrats.