Economic recovery: Full steam ahead

First quarter ends with solid economic growth and strong momentum going into Q2.

April 16, 2021 – Over the last month, the contours of growth for 2021 came into sharper focus. Nonfarm employment rose by 916,000 in March, while consumer confidence hit its highest mark since the start of the pandemic. Measures of real-time consumer spending indicated a sharp acceleration in spending in the final weeks of March as stimulus checks made their way into consumers’ pockets. The trends pointed toward solid economic growth to end the first quarter and signaled strong momentum going into Q2, which will likely be the strongest quarter of growth this year. Fiscal support from the most recent stimulus package combined with the ongoing vaccination campaign and reopening process are all culminating to help lift estimated Q2 gross domestic product (GDP) growth to 9.3 percent (annualized) following what we estimate was 6.6 percent growth in Q1. The outlook this month includes for the first time the president’s $2 trillion infrastructure package, which is expected to influence government spending and thus overall GDP growth in H2 (second half).

With such a robust start to this year, we now expect GDP growth to rise 6.1 percent relative to last year. The upgraded outlook this month reflects the faster than expected rebound in hiring activity and surprising pace of consumer spending. Turning the page to 2022, more modest rates of growth are expected, with GDP growth rising 3.4 percent. The economy will continue to benefit, however, from both fiscal support and the eventual return of services spending, which will keep the rate of growth next year above its longer-run average.

Highlights:

  • A booming economy to start the year
  • Labor market recovering faster than expected
  • Government spending to lift growth
  • Monetary policy timeline questioned

Real gross domestic product (SA, CAGR and YoY* percent change)

Illustration of a bar chart showing seasonally adjusted real GDP. See adjusted real GDP image description.
A bar chart showing seasonally adjusted real GDP, with compound annual growth ranging from 2.9% in March 2019 to -31.4% in June 2020, 33.4% in September 2020 and 6.6% in March 2021, with growth forecast to reach 3.2% by year-end 2021 and 2.9% by year-end 2022. YoY growth ranged from 2.3% in March 2019 to a low of -9% in June 2020 and returning to positive levels with 0.5% in March 2021. YoY growth is forecast to reach 5.7% by year-end 2021 and 2.9% by year-end 2022.

Government contribution to GDP growth (percentage points)

Illustration of a bar chart showing government contribution to GDP growth. See GDP growth image description.
A bar chart showing government contribution to GDP growth ranging from 0.4% in March 2019 to -0.96% in Sept-2020 and 1.5% in March 2021, with growth forecast to reach 1.1% by year-end 2021 and 0.7% by year-end 2022.

*Seasonally adjusted (SA), compound annualized growth rate (CAGR), year-over-year (YoY).

Sources: Visa Business and Economic Insights and U.S. Department of Commerce.

Labor market rebound boosts spending

This month we upgraded our outlook for consumer spending to reflect both stronger stimulus effects and faster hiring activity than expected. We now expect the unemployment rate to reach 5.2 percent by the end of this year and 4.6 percent by the end of 2022. The stronger hiring activity will eventually begin to bring more individuals back into the work force.

As a result of our stronger labor market outlook, we have upgraded personal income growth as well. Nominal consumer spending is now expected to rise 18.9 percent YoY in Q2, in part due to the sharp contraction last year, but also as a result of stronger fundamentals including stronger income growth. Real disposable income is expected to climb 9.4 percent this year. Nominal consumer spending for this year is now expected to rise 10.2 percent YoY and 5.1 percent in 2022.

While the faster rebound in economic activity is good news, it does raise further concerns about the inflation environment later this year. The rise in inflation expectations has also boosted long-term interest rates. Both higher interest rates and inflation could create headwinds to consumer spending should global supply chains continue to struggle to meet U.S. demand.

Putting the “G” in GDP

In the first few months of the Biden administration and new Congress, a clear shift in the role of government spending and investment has materialized. The release of the president’s infrastructure proposal last week highlighted this change as we now expect the roughly $2 trillion package to pass sometime in Q3 of this year. The result will lift both federal and state and local government investment in the second half of this year. It will also extend the influence of government spending on GDP—which began last year with multiple rounds of stimulus—into next year. We now expect government spending to contribute 0.7 percentage points to GDP growth this year and 0.9 percentage points in 2022.

Looking for liftoff

While we believe the Fed is unlikely to lift interest rates anytime soon, the faster pace of recovery certainly increases the risk that they could move up their timeline. The Fed has been clear that they are fine with inflation above their 2 percent target for some time, but that assumes the labor market will not make a full recovery. Should the acceleration in hiring activity continue, look for financial markets to start pricing in the possibility of less monetary accommodation later this year and into next.

Forward-Looking Statements

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