U.S. economy signals strong start to 2021

February 15, 2021 – Running up the score in the first half

With the conclusion of the big game (proudly sponsored by Visa), attention of this team of economists now turns to reading the incoming economic data for signs of how Q1 is shaping up. While it would be easier to just punt and cite the ongoing uncertainty, we have crunched the numbers and now think that Q1 gross domestic product (GDP) growth will be much stronger than expected. Two key factors led to our sharp upward revision for both the first and second quarters of this year. First, it now appears that the most recent stimulus package, passed in December, had a greater influence on consumer spending than first thought. Real-time consumer spending data indicates that spending surged in January. Second, another $1.9 trillion stimulus package will likely be passed sometime before the end of Q1. Given the size of the package, we now expect GDP growth to hit 5.5 percent in Q2 as the stimulus checks and other programs lift growth. While we expect the stimulus program to lift consumer spending, we think it will also likely slow the pace of the labor market recovery.

With the changes to the outlook this month, we now expect GDP growth to rise 4.5 percent in 2021 compared to the 3.5 percent contraction in 2020. Looking ahead to 2022, we expect GDP growth at 3.1 percent as the gradual labor market recovery begins to take hold. Thematically, the first half of this year will represent solid economic growth before downshifting slightly in the latter half of the year (bottom left chart). A stimulus-fueled pick-up in consumer spending, a solid housing market, and improving business investment should all support growth.

Highlights:

• Surge in consumer spending activity in January
• Fiscal policy having a positive effect on growth
• The labor market recovery will be slow

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

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

Consumers coming off the sideline this quarter

One of the most significant upward revisions in our outlook this month is regarding both real and nominal consumer spending. Real-time measures of consumer spending activity, including credit and debit spending from Opportunity Insights, showed a surge in consumer spending activity in January. The good news is that the stronger spending appears to be in discretionary spending, which had been lagging so far in the recovery. Early evidence suggests that the December stimulus program had a higher multiplier effect on growth than the CARES act passed last April, with more spent. Real consumption is now expected to rise 4.2 percent (annualized) in Q1 and 5.7 percent in Q2. Stimulus effects will drive consumption in these two quarters, as we assume an additional $1.9 trillion package will pass. There are two factors that should help lift nominal consumer spending throughout 2021. The real spending growth, in part fueled by stimulus and higher inflation readings. For 2021 as a whole, we see nominal consumer spending rising 7.6 percent (YoY). Real spending should rise 4.8 percent, with inflation edging higher to 2.7 percent. We expect nominal spending to rise a more modest 5.2 percent in 2022 as higher inflation and waning stimulus effects eventually begin to moderate the pace of spending.

Thoughts on the labor market recovery

We are a bit more pessimistic on the labor market recovery than some other forecasters. Consistent with the nonpartisan Congressional Budget Office, we see the enhanced unemployment insurance (UI) benefits proposed in the $1.9 trillion stimulus program as boosting output but slowing the labor market recovery. The enhanced UI benefits in many states would exceed the normal salaries in those states and thus reduce the incentive to work. While the increase in economic growth would offset some of the negative effects on employment, the net result of a $400 boost payment to UI benefits would be to slow the labor market recovery.

Risks to the outlook

For the first time in a while, we now see more upside risk to GDP growth this year than downside. The virus remains a key downside risk, especially in light of business reopenings and new variants of the virus, which could lead to further lockdowns. While we are assuming the $1.9 trillion stimulus program will get passed, further stimulus or an infrastructure plan would all serve as upside risk to growth this year. There could also be upside risk if the pass-through effects of the current stimulus program end up being larger than anticipated.

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