US GDP bounced 6.4% in Q1 2021, its largest first quarter rise since 1984 and beating estimates of 6.1%. GDP is now less than 1% lower than pre-pandemic. In addition, the US property market has rebounded strongly.
The economic recovery can be attributed to strong consumer spending after the enormous fiscal stimulus of trillions of dollars, as well as the lifting of lockdown restrictions and an improving health picture with an accelerated vaccination programme, which has now seen approx. 30% population vaccinated. President Biden has committed to return the US to ‘normal’ as much as possible by 4 July, Independence Day; the mayor of New York, Bill de Blasio intends to lift restrictions in the city on 1 July.
Despite the fast pace of economic recovery and almost 1m new jobs in March, the Federal Reserve intends to continue with monetary policy support of $120bn of monthly bond purchases and keep interest rates close to zero. The Fed is targeting full employment (the US labour market remains over 8m short of pre-pandemic employment levels) and 2% average inflation. Whilst an inflation surge is expected this year, the Fed considers it to be due to ‘transitory factors’. The markets are now expecting interest rates will start to rise in early 2023, about a year earlier than expected before March.
US companies are currently reporting quarterly earnings, many of which are exceeding estimates, including technology companies Apple, Facebook, Microsoft and car-maker Tesla. Even McDonald’s has reported strong results with a return to pre-pandemic levels of trading as lockdown rules have been eased. A bell-weather of global construction, Caterpillar has seen strong demand for its heavy machinery and generators, a good indicator of the strong global economic recovery in progress, a fact reinforced by copper hitting a 10-year high and oil prices rallying.
President Biden has now completed his first 100 days in office. This period has seen an accelerating economic recovery, large scale vaccination rollout and $1.9tn stimulus package. He is now focused on a large expansion of the US government to rebuild infrastructure and reshape the economy. This will be partly funded by tax rises for wealthy individuals and companies. Mr Biden is now proposing $2.3tn infrastructure package and $1.8tn for children, families and education. It remains to be seen if he will succeed at getting both these enormous packages implemented in a divided Congress and only a slim political majority, but the direction of travel is clear.
Overall, it is unsurprising that US markets are hitting new highs with the potent three-way combination of the vaccine, massive government stimulus and dovish Federal Reserve. Provided that inflation can be kept under control, US markets are in buoyant mood.
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