NAM: Monday Economic Report
Personal income soared 21.1% in March, buoyed largely by stimulus checks, the largest monthly increase in the history of the series, which dates to January 1959. Total wages and salaries increased 1.1% in March, or 1.9% in the first quarter overall. Aggregated manufacturing wages and salaries rose 1.4% in March but remained 1.1% lower than before the pandemic.
Personal consumption expenditures increased 4.2% in March, bouncing back from the 1.0% decline in February and the largest monthly increase since June 2020. Durable and nondurable goods purchases jumped 10.8% and 6.5%, respectively, with service-sector spending up 2.2%.
Despite the solid increase in personal consumption expenditures in March, the data suggest that Americans saved more of their extra dollars than they spent. As a result, the saving rate nearly doubled from 13.9% in February to 27.6% in March, the highest since April 2020 (33.7%).
The Conference Board and the University of Michigan both reported that consumer confidence reached the best readings in at least 13 months, with Americans more upbeat about economic growth and the labor market and with increased purchasing intentions in their outlook.
The U.S. economy grew 6.4% at the annual rate in the first quarter, building on the 4.3% gain in the fourth quarter. The data were buoyed by robust rebounds in consumer spending and sizable growth in business fixed investment and government spending, but growth would have been larger if not for weaknesses in spending on inventories and nonresidential structures and in net exports.
More importantly, real GDP remains just 0.9% shy of the pre-pandemic levels seen at the end of 2019, and the U.S. economy should return to that pace in the next quarter, even as growth remains well below trend (of where it would have been without COVID-19).
The current forecast is for 6.5% growth in 2021 overall, boosted by more Americans getting vaccinated, pent-up consumer and business demand and government stimulus.
After falling 0.9% in February, largely from poor weather and supply chain disruptions, new orders for durable goods rose 0.5% in March, or growth of 1.6% with transportation equipment excluded. Overall, the durable goods sector is growing rapidly, rising 4.1% over the past 13 months, or 10.8% with transportation equipment excluded since February 2020.
Nondefense capital goods excluding aircraft—a proxy for capital spending in the U.S. economy—rose 0.9% to $73.2 billion in March, a new record. Core capital goods orders have soared 10.2% over the past 13 months, as firms have ramped up activity on the brighter economic outlook.
The PCE deflator rose 0.5% in March, the fastest monthly pace since June 2020. Excluding food and energy prices, the PCE deflator rose 0.4% in March, the most since October 2009. Overall, the PCE deflator has risen 2.3% year-over-year, the most since August 2018, and core inflation has increased 1.8% since March 2020, the fastest pace since August 2019.
Cost pressures have accelerated, but the key will be whether those price increases are transitory or more sustained. Core inflation is likely to exceed 2% year-over-year in the coming months. To the extent that the current price growth is transitory, the Federal Reserve is likely to accept inflation that runs a little hotter than we have become accustomed to, particularly if the longer-term average continues to hover around 2%, which is its stated goal.
For its part, the Federal Open Market Committee will continue to pursue extraordinary measures until it achieves its mission of full employment and price stability and until economic growth returns to trend, but the Federal Reserve will also monitor inflationary pressures and supply chain constraints closely moving forward.