Economic Analysis and Policy Outlook of the U.S. in April 2021
Conclusions
Since the Biden administration came to power, vaccinations have been arranged in an orderly way, fiscal stimulus has been adequate, and the pandemic has been well controlled. The U.S. economy continued to recover in April. The concrete manifestations included that consumer confidence has restored, consumer spending has increased, and manufacturing orders have been sufficient. However, there are still shortages in the labor market, and it has not yet returned to a level of full employment. As vaccines are not fully available and travels have not yet fully recovered, the recovery of the service industry in the U.S. is not as good as that of the manufacturing industry. Constrained by factors such as labor shortages and extreme weather, the supply of parts and components has been sluggish, and at the same time, combined with factors such as the U.S. dollar index going down, commodity prices rising, and inflationary pressures increasing. The real estate market in the U.S. is also relatively prosperous, with house prices and rents rising to varying degrees. However, since the labor market and economy have not yet returned to the target level of The Federal Reserve (the Fed), the Fed is not expected to rush to raise interest rates.
Real economy
About GDP
According to the latest estimate of the U.S. Department of Commerce, the U.S. GDP growth rate in the fourth quarter of 2020 was estimated at 4.3% for the third time, which was 0.2percentage points higher than the second estimate. The revised estimate is mainly due to the increase in private inventory investment and government consumption expenditure. Among them, private inventory investment was raised by 0.26percentage points, contributing 1.37 percentage points to GDP growth, mainly thanks to the replenishment of inventories by retail traders. The downward revision is mainly due to a 0.11 percentage point reduction in non-residential investment, which contributes 1.65 percentage points to GDP growth, mainly due to a reduction in investment in oil and natural gas drilling machinery.
About Economic Activities
In March 2021, the manufacturing PMI recorded 64.7, and the non-manufacturing PMI recorded 63.7. It has been in expansion for 10 consecutive months, and manufacturing and non-manufacturing activities continue to recover. Demand is still expanding. The new order index recorded 68, an increase of 3.2percentage points from the previous period; on the supply side, the production index recorded 68.1, an increase of 4.9percentage points from the previous month, reaching the highest level since January 2004. The employment index recorded 59.6, an increase of 5.2percentage points from the previous month. The continued strong new order level, low customer inventory and high backlog of orders indicate the potential employment intensity in the next three months; the price index recorded 85.6, 0.4percentage points lower than that of the previous month, but it was still at a very high level in history. This shows that the pricing power of suppliers continues to increase, and supply chain commodities are scarce.
On the demand side, the business activity index recorded 69.4, an increase of 13.9 percentage points from the previous month, setting a historical record; the new order index recorded 67.2, an increase of 15.3 percentage points from the previous month; the service industry employment index recorded 57.2, an increase of 4.5percentage points, and companies are actively recruiting workers to meet the needs of new customers; the order backlog index recorded 50.2, a decrease of 5percentage points from the previous month, but 41% of the surveyed companies said that they did not measure outstanding orders .
On the supply side, the supplier delivery index recorded 61, an increase of 0.2 % from the previous month. A reading above 50 indicates that the delivery speed is slow. Respondents reflected difficulties such as port delays, transportation delays, parts shortages, and difficulties in finding loading trucks, etc.; the service industry price index recorded 74, 2.2 % higher than the previous month, indicating that prices rose faster in March. The survey showed that prices in all 18 service industries were rising.
About Personal Consumption
On March 6, the Biden government launched a US $1.9 trillion fiscal stimulus plan. Measures include extending unemployment benefit by US$300 per week, paying US$1,400 to most Americans, and gradually increasing the standard for obtaining stimulus checks from the upper limit of personal annual incomes to US$80,000. This round of subsidies will significantly increase consumer demand. In April, the U.S. consumer confidence index rose to the highest level of the year, recording 86.5. Due to low interest rates, strong fiscal stimulus, and advances in vaccination, consumers have generally reported rapid economic growth and strong employment growth. U.S. retail sales (excluding food) in March increased by 9.44% month-on-month, an increase of 26.87% from the same period last year. The Fed's Beige Book released in April stated that U.S. economic activities have recovered moderately and consumer spending has increased, but employment growth is still limited by labor shortages. In February, new orders for durable goods recorded a year-on-year growth rate of 3.2%, durable goods shipments recorded a year-on-year growth rate of 1.4%, total durable goods inventories recorded a year-on-year growth rate of 1.1%, and outstanding orders fell by 5.8% year-on-year. U.S. car sales in March continued to increase compared to the previous month, with 18.2 million units recorded. All data show a strong consumer demand.
Job Market
Non-agricultural employment increased by 916,000 in March, which greatly exceeded expectations (650,000). The new job were mainly created with an increase of 280,000 people in the leisure hotel industry, 101,000 people in education and healthcare services, and 110,000 people in the construction industry. At present, the number of non-agricultural employment has returned to 94.5% of the number before the pandemic (February 2020), of which employment in the leisure and hotel industry, and mining industry accounted for less than 90% of the employment before the epidemic. President of Federal Reserve Bank of Cleveland Mester said on April 15 that the U.S. has a long way to go to reach the Fed’s employment goals.
Inflation
The personal consumption expenditure (PCE) price index rose by 1.6% year-on-year in February, and the core PCE value index excluding food and energy rose by 1.4%. Inflation began to rise in March, the CPI index rose by 2.6% year-on-year, and the core CPI index excluding food and energy rose to 1.6%. The CPI inflation this time is mainly contributed by energy, transportation, food and medical care, which rose by 13.2%, 5.8%, and 3.4% respectively year-on-year. Combined with the above analysis of the manufacturing PMI, the starting point of this round of inflation rise is mainly caused by demand expansion and poor supply chain. For long-term inflation above 2%, continuous strong demand throughout the year is required.
Real Estate Market
The residential real estate market remains active. The median price of existing home sales continued to rise, with a record of US$ 329,000 in March, an increase of 17.2% year-on-year; the 30-year average fixed interest rate of mortgage loans in the U.S. rebounded slightly to 3.1%; and the inventory of existing homes recorded a record low of 1.07 million units. The U.S. CPI housing rent breakdown increased by 1.7% year-on-year.
Commodity Market
The rise in commodity prices is related to the increase in demand and the weakening of the US dollar index. Global demand has rebounded, and commodity prices have generally risen. On April 23, the price of NYMEX crude oil rose to US$62.04/barrel; the price of LME copper rose to US$9551.5/ton; the price of LME aluminum rose to US$2369/ton. As the U.S. dollar is the denominated currency for most commodities, a weaker U.S. dollar tends to push up commodity prices. The strength of the U.S. dollar has a negative correlation with the CRB spot index, which represents the price of commodities. It is expected that the Fed's continuously easing expectations will further weaken the U.S. dollar index and commodity prices are expected to rise.
World Economy
The global economy rebounded and growth prospects continued to improve. The manufacturing PMI data of Eurozone and Japan performed better than expected, and the economic recovery accelerated. In March, Japan’s manufacturing PMI was recorded 52.7, service PMI recorded 48.3; in April, German manufacturing PMI recorded 66.4, service PMI recorded 50.1; in April, French manufacturing PMI recorded 59.2, service PMI recorded 50.4; the British manufacturing PMI recorded 60.7, and the service industry PMI recorded 60.1. The global economy still relies on vaccination coverage and the intensity of pandemic control. If inflection will not resurge in the major economies of the world, the prospects for recovery shall be good.
Outlook on FOMC Meeting and Rate Cut Forecast
Since the Biden administration came to power, vaccinations have been arranged in an orderly way, fiscal stimulus has been adequate, and the pandemic has been well controlled. The U.S. economy continued to recover in April. The concrete manifestations included that consumer confidence has restored, consumer spending has increased, and manufacturing orders have been sufficient. However, there are still shortages in the labor market, and it has not yet returned to a level of full employment. As vaccines are not fully available and travels have not yet fully recovered, the recovery of the service industry in the U.S. is not as good as that of the manufacturing industry. Constrained by factors such as labor shortages and extreme weather, the supply of parts and components has been sluggish, and at the same time, combined with factors such as the U.S. dollar index going down, commodity prices rising, and inflationary pressures increasing. The real estate market in the U.S. is also relatively prosperous, with house prices and rents rising to varying degrees. However, since the labor market and economy have not yet returned to the target level of The Federal Reserve (the Fed), the Fed is not expected to rush to raise interest rates.
