With the strong GDP figures recently announced by the Commerce Department, I thought it would be a good time to maybe take a step back and just review the economic fundaments. Since we’re constantly inundated with headlines pertaining to politics and the markets, we can sometimes take our eye off the ball of what truly matters – and those are corporate and economic fundamentals.
In the first quarter, the U.S. economy grew at a 6.4% annual rate. This gets us back to within 1% of our all-time peak that was set in late 2019 prior to the pandemic. Given that personal consumption makes up over 68% of the U.S.’s GDP, really no surprise that the biggest contributors to the strong growth was personal consumption, which increased by 10.7%. Goods and services were up 23.6% and 4.6%, respectively. Within the service sector, which has been the hardest hit during the pandemic, the biggest increases were in transportation, up 11.5%, accommodations up 9.5%, and food service, which was up 5.8%.
The Stimulus and The Recovery
If you think back to where we were last summer when we received 2nd quarter GDP numbers showing the economy had contracted by a record 31.4% to where we are today, it’s quite remarkable. The speed of the recovery has really been what the market has forecasted, or expected, given that it is up over 87% from the bottom and making all-time highs along the way.
If you pointed to three areas that led to this strong and robust recovery, they would be stimulus, both by the Federal Reserve and Washington, vaccinations, and the reopening of the economy. When we talk about stimulus, the amount that has been aimed at the pandemic is staggering.
Congress and both Presidents, Trump and Biden, have approved packages totaling almost $5 trillion. That, coupled with a Federal Reserve that has dropped rates to zero, has been a major contributor of the economic turnaround. To put things in prospective, if you looked at Fiscal and Federal Reserve stimulus as a percentage of GDP during the Great Recession, they came in at about 8%. Those figures are approximately 21% for fiscal stimulus and 18% for stimulus by the Fed. We’ve more than doubled what we were during the 2008 Financial Crisis.
This stimulus has actually propelled household income to increase at a record rate of 21.1% in March, making it the largest monthly increase since the government started keeping records back in 1959. And with the personal savings rate climbing to 27.6% in March, there is still a good bit of money sitting on the sidelines that can be spent as the economy reopens. In fact, according to Moody’s Analytics, the amount of money in savings account for about 12% of U.S. GDP.
Vaccinations and Resuming Normal Activities
Another positive is the reduction in COVID cases and the numbers of people vaccinated. According to JP Morgan, at of the end of April, about 67% of the world had been either infected or vaccinated. They indicated it put the world into the 60% – 80% zone for herd immunity. Reaching heard immunity should slow the spread of the virus.
With vaccinations on the rise in the U.S., and restrictions being lifted, they have allowed the population to resume some normal activities they have been unable to do for over a year. Areas that have improved substantially since the vaccine news came out have been hotel occupancy and seated dining, down just 20% from their pre-pandemic levels. TSA travel is still down 40% but still an improvement from the 96% it had fallen last April.
One metric that is close to being back to pre-pandemic levels is travel and navigation app usage. The travel site Orbitz has seen its usage increase 100% since mid-2020. I’ve talked to some people that have seen airfares increase 50% in the last two weeks. This is evidence there is a strong desire from the majority of the population to travel and enjoy experiences they haven’t been able to for a while now.
Other economic metrics have also improved. The manufacturing and service economies are still expanding, and unemployment which had hit a high of 14.8% last April was at 6% in March.
All of this positive economic news can be seen in corporate earnings so far this year. We have seen average sales and earnings beating estimates by 4% and 24%, respectively. Earnings growth is up over 60% over the last year. And as we repeatedly stress, stock prices follow earnings.
What Does the Future Look Like?
Well, many economists expect the economy to grow anywhere from 6% to 8% this year. That would be the fastest growth rate in decades. For investors, this is a positive. Most major downturns in the market are tied to recessions. Based on this data, the probability of a recession looks very low.
That being said, could we see pullbacks and potential negative surprises? We certainly can. In the past we’ve discussed risks like inflation, higher interest rates, COVID variants, elevated valuations and tax increases that could all cause the economy and markets to change direction over the short term. But based on the data we are seeing now, the economy is doing well.