by The Gould Asset Management Team Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the First Quarter of 2021. The excerpt is posted here for the benefit of our blog subscribers.
US Economy Gaining Momentum
The US economy expanded at a 4.3% annualized rate in the fourth quarter of 2020. Last year was the first annual contraction since the Great Financial Crisis (2007-2009), but the fourth quarter’s growth, combined with positive signs this year, point to rising expectations for 2021.
Unemployment fell to 6.0% last month as the economy added 916,000 jobs in March, with the hospitality sector leading the way. While this is great news for the improving economy, the headline unemployment rate does not capture the nearly 4 million workers no longer in the labor force compared to the beginning of last year. With those included, unemployment is closer to 9%.
Manufacturing activity soared in March with strong growth in new orders, production, and employment. The sector faces component shortages and higher costs caused by global supply disruptions ranging from freezing weather in Texas to the Suez Canal blockage to a worldwide shortage of semiconductors.
US home prices surged over the past year, rising more than 15%. Existing home sales fell in February, held back by extraordinarily low inventory. New home sales also declined on the heels of disruptive winter weather. Demand for new and existing homes remains high. Historically low mortgage rates and a rebounding economy could keep the housing market hot for some time.
The Fed Sees a Brighter Light at the End of the Tunnel
The Federal Reserve pledged to keep dovish monetary policies in place, keeping short-term interest rates low and continuing its open-market bond purchases until the economy recovers further from the pandemic. Most Fed officials do not forecast a rate hike before 2024, but investors increasingly expect one sooner.
In its projections, the Fed sees a much stronger economy and higher inflation in 2021. Latest figures show the economy expanding by 6.5%, its strongest pace since the early 1980s, and the inflation rate rising to 2.4%.
Fed Chair Jerome Powell stressed that any pickup in inflation will likely be transitory and will not require raising its federal funds rate.