US economic outlook: The FOMC remains in wait-and-see mode
|We have made only modest changes to our U.S. forecast since last month and continue to look for real GDP to grow at an above-consensus rate of 6.4% this year.
Notably, expectations for a significant upturn in U.S. growth this spring have started to turn into a reality. Fueled by an improving health picture, better weather and another round of significant fiscal support, recent employment and survey data show activity shifting into a higher gear.
The near-term growth outlook could be even stronger were it not for worsening supply constraints holding back production and sales. Slightly stronger growth in Q1 consumer spending since our March forecast is expected to be offset, at least partially, by a slower restocking of business inventories.
We have also pared down our expectations for residential investment, as housing activity is constrained by low inventory and building material shortages.
Our inflation forecasts have been nudged up in response to intensifying pressures across supply chains and a further rise in inflation expectations. Core PCE inflation is now expected to increase2.3% year-over-year by the end of this year and through the first half of 2022.
Despite evidence of a sharp rise in economic activity and stronger prospects for inflation, the FOMC remains in wait-and-see mode. As a result, we continue to expect the Fed to hold off on tapering asset purchases until next year and the fed funds rate to remain on hold at least through 2022.
The boom is upon us
Expectations for a signifcant upturn in U.S. growth this spring have started to turn into a reality. The consequence of an improved public health picture, warmer weather and more fiscal support are generating a burst of activity not seen in decades. Our latest outlook for the U.S. economy is little changed since March, and we continue to look for real GDP growth of 6.4% this year, which, it is worth repeating, would be the strongest pace in more than a generation. We have made some modest adjustments across sectors this month, including slightly stronger consumer spending but larger drags from trade and inventories. However, those dynamics underscore that this cycle continues to move quickly and that the long-awaited full-re-opening boom is upon us.
The sharp acceleration in economic activity is perhaps most evident in the latest ISM surveys. The manufacturing index hit a 37-year high in March, with the more encompassing services survey reaching its highest mark since records began in the late 1990s. But high-frequency data, particularly for the hard-hit travel and hospitality sectors, also indicate the pace of recovery has quickened over the past month.
The jobs recovery has also shifted into a higher gear with employers adding 916K new jobs in March, nearly twice the pace of February. That figure is remarkable in that the survey week preceded any direct effect of Washington's latest fiscal eorts (the $1.9 trillion American Rescue Plan, or ARP), and it speaks to the growing optimism among businesses. Spending is on track to follow. Nearly 80% of the direct checks to households in the ARP, worth an estimated total of about $280 billion, reached bank accounts by the end of March. Auto sales soared to a three-and-a-half-year high last month, pointing to another surge in retail spending.
We have slightly upgraded our expectations for Q1 household spending and look for real outlays to advance at a 7.2% annualized clip in Q1. We continue to look for spending to strengthen to a double-digit pace over the second and third quarters, driven not only by the latest round of fiscal support, but savings built up over the course of the pandemic. By our estimates, households would still have a little over $2 trillion in “excess savings” by the fourth quarter, representing not only an upside risk to ournear-term forecast, but also a reason for growth in consumer spending to remain well above trend beyond this summer.
To some extent, the near-term growth outlook could be even stronger. While services spending is expected to be the main driver of overall GDP growth in the coming months, goods spending by consumers and businesses remains solid. Yet businesses are having trouble meeting demand. For months, producers have struggled to get their hands on materials and nd workers. While there are some signs of labor constraints easing as the health situation improves, such as the six-month high in factory hiring in March, bottlenecks across supply chains have intensified. The six-day blockage of the Suez Canal was just the latest event with which logistics managers have had to contend.
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