New York (CNN Business)The American economy is roaring back to life as the once-in-a-century pandemic winds down.
The US economy just notched its fastest first-quarter GDP growth in nearly four decades. Armed with stimulus checks and tax credits, Americans are spending aggressively. Hiring is surging as broad swaths of the economy — including even New York City, the epicenter of the pandemic — prepare to fully reopen for business.
We came into this year very, very bullish on the US economy. We are even more bullish as we sit here today."
Apple, Amazon, Caterpillar (CAT) and other major companies are minting money. And the stock market is off to its hottest start to a presidency through 100 days since the Kennedy administration.
“I’ve never seen an economy that feels as good as this one today,” Mark Zandi, chief economist at Moody’s Analytics, told CNN Business. “The economy is booming. It’s busting out all over.”
The American comeback story may just be getting started. Oxford Economics is predicting US GDP will grow at an average pace of 7.5% in 2021 — a sizzling pace unseen since 1951.Read MoreThe sharp recovery is being driven by the powerful one-two punch of unprecedented stimulus from Washington and the rollout of vaccines, which is a form of stimulus itself.
‘The K is turning into a V’
And yet the rebound is incomplete and uneven, leaving millions of Americans on the outside looking in. There are nearly 8 million fewer jobs today than before pandemic erupted. More than 2.5 million women dropped out of the workforce. Low-income workers and people who relied on travel, entertainment and restaurants for their livelihoods are struggling. All of this has fed the notion of a K-shaped recovery: one where the large segments of the population are left behind as the rest of the economy zooms ahead. The good news is there is growing confidence that a more inclusive recovery could be taking hold as the pandemic draws to a potential close.
Biden at 100 days: Hottest stock market since JFK”The K is turning into a V — very rapidly,” Zandi said. “We were in this deep, dark hole a year ago, but now we can clearly see getting out of it, and getting out quickly.”The swift vaccination campaign is allowing states and cities to lift health restrictions and should give Americans confidence to return to restaurants, ballparks and airplanes. “The reopening of the economy will really benefit those who have been hit the hardest: the lower leg of the K-shaped economy,” said Kristina Hooper, chief global market strategist at Invesco.
Shortages of chips, workers and materials
Part of the optimism is being driven by signs of enormous pent-up demand from reopening businesses and consumers flush with cash. David Gitlin, the CEO of air conditioning maker Carrier, was bracing for a sharp rebound. Yet he’s been taken aback by the scale of it.”We came into this year very, very bullish on the US economy. We are even more bullish as we sit here today,” Gitlin told CNN Business.
The global chip shortage is going from bad to worse. Here's why you should careCarrier’s residential HVAC sales soared 50% year-over-year in North America. Organic sales are now 6% above the level of two years ago.If anything, CEOs are worried they won’t be able to meet all the demand. Just look at the disruptions caused by the massive computer chip shortage that is derailing the production of cars, smartphones, tractors and appliances. Apple (AAPL) alone said revenue will be up to $4 billion lower this quarter because of “supply constraints” such as procuring chips. At the same time, the cost of copper, lumber and other raw materials has climbed sharply. And businesses are having serious trouble finding the skilled workers required to ramp up.”There is a lot of competition for talent,” said Gitlin, who added that Carrier is hiring hundreds of workers in Tennessee alone. “It’s a challenging environment to hire in right now. We have to go to great lengths.”The growing pains make sense given the rapid nature of the rebound from the historic collapse. It’s not easy to go from zero to 60.”We have never seen as fast a recovery as we are seeing right now,” said David Kelly, chief global strategist at JPMorgan Funds.
The inequality problem
All of this begs the question: Does the US economy really need the additional help being pushed by the White House?President Joe Biden is calling for Congress to enact a $2 trillion infrastructure package aimed at rebuilding roads, bridges and airports and creating a clean energy economy. Biden also unveiled a $1.8 trillion American Families Plan that would expand access to education, childcare and paid family leave. Despite his extreme optimism about the short-term US outlook, Zandi, the Moody’s economist, does think these investments make sense because they would lift long-term economic growth. The American Jobs Plan is designed to boost the nation’s lackluster productivity growth by improving infrastructure and making US companies more competitive. And the families plan is aimed at allowing more Americans to join the workforce by helping low-income families with childcare and eldercare.
Elizabeth Warren: US taxes are rigged in favor of Amazon, Netflix and other big companies”It’s about getting the economy moving faster in the long run,” Zandi.Both plans would be paid for in part by raising taxes on the wealthy and corporations. Biden’s economic agenda is taking aim squarely at America’s inequality problem, which has helped fuel the rise of populism. The gap between rich and poor, and the shrinking middle class, isn’t sustainable. “Easing inequality can diminish the argument, on both the left and the right, that the system is so broken that you have to burn the building down,” said JPMorgan’s Kelly.
Bubbles and inflation risks linger
None of this is to say the US economy doesn’t face risks, known and unknown (after all, few saw a pandemic coming until it was too late). The pandemic is not over and the exploding case count in India is a reminder of the lingering health risks, especially from variants that could evade vaccines. There are also legitimate concerns that all of the stimulus from the Federal Reserve and Congress, on top of the reopening of the economy, could fuel runaway inflation. A serious overheating would force the Fed to put out the fire by raising interest rates so rapidly that the recovery itself would be threatened. If the Fed keeps its foot on the pedal too long, it could also inflate asset bubbles (if it hasn’t already) that would derail the recovery when they pop.
Kelly worries the Fed is waiting too long to take the punch bowl away, as it’s been known to do. He warns asset prices are rising to unsustainable levels that will set the stage for a “crash” when interest rates rise. “I feel like the party is in full swing,” Kelly said, “and the Federal Reserve is just arriving with further cases of champagne.”
Source: edition.cnn.com