Economy buoyed by stimulus and drop in virus cases - Capital Economics
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Economy buoyed by stimulus and drop in virus cases

US Economics Weekly
Written by Paul Ashworth
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Economic activity seems to have responded strongly to the latest round of fiscal stimulus passed in mid-December and the drop in coronavirus case numbers, which has allowed for the easing of containment measures in many states. But there are also signs that inflationary pressure could already be building, which will only heighten concerns about adding even more stimulus to the mix this year.

Economic activity seems to have responded strongly to the latest round of fiscal stimulus passed in mid-December and the drop in coronavirus case numbers, which has allowed for the easing of containment measures in many states. But there are also signs that inflationary pressure could already be building, which will only heighten concerns about adding even more stimulus to the mix this year.

Economy bouncing back after COVID soft patch

The 5.3% m/m jump in January retail sales, which was well above market expectations, was driven principally by big double-digit gains in discretionary components like home furnishings and electronics. Those gains suggest the $600 stimulus cheques are working as intended, with households more confident about spending their windfalls this time rather than last April, when the first round of cheques was sent.

Nevertheless, the relatively smaller 6.9% m/m rebound in food services sales was arguably more encouraging, because it demonstrates that the drop off in coronavirus case numbers is also providing a boost to activity. Whereas the one-off boost from the cheques will soon be reversed (at least until the next $1,400 instalment arrives, probably in April), the recovery in food services should go from strength to strength. Moreover, we know from the correlations over the last 12 months that if food services are benefitting from fewer virus cases, then other services spending that isn’t included in the retail sales figures – particularly health care – will also be recovering.

Given the size of the jump in underlying retail sales in January, even allowing for a drop back in February, we now expect both first-quarter consumption and GDP growth to be close to 8% annualised. Taking the CBO’s estimate that the output gap was 3.3% in the final quarter of last year at face value, that would imply the gap will have shrunk to around 1.5% in the first quarter, which will only increase fears that adding another $1.9trn of stimulus this year, equivalent to 9% of GDP, risks igniting inflation.

Inflation bubbling under the surface

Admittedly, looking at the last few months’ worth of CPI data, there seems to be little reason to worry, with core inflation falling to only 1.4% last month. But the producer price data told a different story, with core final demand prices increasing by 1.2% m/m. PPI consumer services prices have been growing at a very rapid pace in recent months – in part due to higher Medicare reimbursement rates – and that will have important implications for the PCE measure of core inflation. Rather than CPI, PCE is what the Fed is targeting. (See Chart 1.)

Chart 1: PCE & PPI Services Inflation (%)

Source: Refinitiv

The week ahead

Although not officially confirmed yet, President Joe Biden is expected to use his State of the Union Address this week to reiterate support for his massive $1.9trn American Rescue Plan and, for the first time, unveil details of a separate American Recovery Plan. The latter will be focused on longer-term priorities like infrastructure and green technology investments. We don’t know what the sticker price of the recovery plan will be, but it’s worth noting that cost will be spread over an extended period, maybe a decade, whereas the rescue plan spending would be concentrated into only one or two years. Fed Chair Jerome Powell will also be on Capitol Hill, with his semi-annual testimony scheduled for Tuesday and Wednesday. We don’t expect any surprises, with Powell likely to be in very dovish mood – stressing that a full labour market recovery will take time and that the Fed can ignore “transitory” inflation.


Data Previews

Durable Goods (Jan.) 08.30 Thu. 25th Feb.

Forecasts

Previous

Median

Capital Economics

Headline orders

+0.5%

+1.3%

+2.8%

Core (ex-transport)

+1.1%

+0.6%

+0.8%

Net orders boosted by fewer Boeing cancellations

Our calculations point to a 2.8% m/m gain in durable goods orders last month, although that was principally due to fewer net cancellations at Boeing. Nevertheless, we have still pencilled in a 0.8% m/m increase in non-transportation orders. That would leave core orders more than 7% up on a year earlier, illustrating that, despite ongoing supply problems, business equipment investment has rebounded sharply from the pandemic.

Boeing’s net cancellations fell to almost zero last month which, after allowing for the usual seasonal pattern, should translate into a big percentage rebound in commercial aircraft orders, albeit from a very low base. With the auto sector suffering ongoing supply problems due to a global semiconductor shortage, we expect motor vehicle orders to be unchanged. Finally, although the survey evidence remains strong, the more modest rise in business equipment output last month points to a smaller 0.8% m/m gain in core orders. (See Chart 2.)

Chart 2: Durable G’ds & Bus. Equip. Prod. (%m/m)

Source: Refinitiv

Personal Income & Spending (Jan.) 08:30 Fri. 26th Feb.

Forecasts

Previous

Median

Capital Economics

Personal Income

+0.6%

+10.0%

+10.0%

Personal Spending

-0.2%

+0.7%

+3.5%

Stimulus boosts both incomes and spending

The $900bn stimulus passed late last year, which included $600 cheques for individuals and an extension of enhanced unemployment benefits, at $300 per week, will have a dramatic impact on January’s income and spending figures.

The second round of cheques were half the size of the first ones sent out last April, while the unemployment benefits are a third smaller and a lot fewer people are unemployed now. The upshot is that we think the former will add $1,500bn with the latter adding $300bn, equivalent to a 9.2% increase in nominal income. (Note that these are annualised dollar numbers.) In addition, while employment increased only modestly in January, the rise in average hours worked points to a 1.0% m/m increase in labour compensation, which raises our estimate for personal income to 10.0% m/m.

The 6.0% m/m increase in control group retail sales will translate into a similar-sized gain in control goods spending, while the 6.9% m/m increase in foods services sales points to a decent gain in a broader range of services. The only drag will be a weather-related fall in utilities spending. Overall, we anticipate a 3.5% m/m gain in nominal spending.

Although core CPI prices were unchanged in January, we know from the PPI data that the PCE deflator will show a big gain in physician’s prices. Altogether we anticipate a 0.2% m/m increase in core prices and, allowing for the surge in energy prices too, a 0.3% m/m rise in overall prices. Core PCE inflation will remain at 1.5% which means that, with core CPI inflation at 1.4%, the former will be higher than the latter for the first time in a decade.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 22nd

Index of Leading Indicators (Jan)

10.00

+0.3%

0.3%

Tue 23rd

Case-Shiller House Prices (Dec)

09.00

+1.4%(+9.5%)

Fed Chair Powell – Semi-annual Testimony (Senate)

10.00

President Biden State of the Union Address

21.00

Wed 24th

New Home Sales (Jan)

10.00

842,000

859,000

850,000

Thu 25th

GDP (Q4, 2nd Est., q/q ann.)

08.30

+4.0%

+4.1%

+4.1%

Fed Chair Powell – Semi-annual Testimony (House)

10.00

Durable Goods Orders (Jan, Prov.)

08.30

+0.5%

+1.3%

+2.8%

Core Durable Goods Orders (Jan, Prov.)

08.30

+1.1%

+0.6%

+0.8%

Initial Jobless Claims (w/e 20th Feb.)

08.30

861,000

Pending Home Sales (Jan)

10.00

-0.3%(+22.8%)

Fri 26th

Advance Goods Trade Balance (Jan)

08.30

-$82.5bn

-$83.0bn

-$82.0bn

Advance Wholesale Inventories (Jan)

08.30

+0.3%

Advance Retail Inventories (Jan)

08.30

+1.0%

Personal Income (Jan)

08.30

+0.6%

+10.0%

+10.0%

Personal Spending (Jan)

08.30

-0.2%

+0.7%

+3.5%

PCE Deflator (Jan)

08.30

+0.4%(+1.3%)

+0.3%(+1.4%)

Core PCE Deflator (Jan)

08.30

+0.3%(+1.5%)

+0.2%(+1.5%)

Chicago PMI (Feb)

09.45

63.8

61.0

60.0

Selected future data releases and events

Mon 1st

ISM Manufacturing (Feb)

10.00

Wed 3rd

ISM Services (Feb)

10.00

Fri 5th

Employment Report (Feb.)

08.30

International Trade (Jan)

08.30

17th Mar

Fed Policy Announcement

14.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020

2021

2022

GDP

+4.0

+7.8

+9.0

+4.3

+4.1

+3.6

(-3.5)

(+6.5)

(+4.0)

CPI Inflation

(+1.2)

(+1.6)

(+3.1)

(+2.5)

(+2.4)

(+2.4)

(+1.3)

(+2.4)

(+2.3)

Core CPI Inflation

(+1.6)

(+1.7)

(+2.5)

(+2.1)

(+2.2)

(+2.2)

(+1.7)

(+2.1)

(+2.2)

Unemp. Rate (%), Period Ave.

6.8

6.4

5.1

4.8

4.5

4.4

8.1

5.2

4.4

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

0.93

1.15

1.25

1.35

1.50

1.55

0.93

1.50

1.75

S&P 500, End Period

3756

3950

4000

4100

4200

4300

3756

4200

4500

$/€, End Period

1.22

1.22

1.23

1.24

1.25

1.25

1.22

1.25

1.25

¥/$, End Period

103

103

102

101

100

100

103

100

100

Sources: Refinitiv, Capital Economics


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com