Market Insider

The economy is on the cusp of a major boom and economists believe it could last

People crowd outdoor dining at a restaurant as coronavirus disease (COVID-19) restrictions are eased in Ann Arbor, Michigan, U.S., April 4, 2021.
Emily Elconin | Reuters

The economy has entered a period of supercharged growth, and instead of fizzling, it could potentially remain stronger than it was during the pre-pandemic era into 2023.

Economists now expect the second quarter to grow at a pace of 10%, and growth for 2021 is expected to be north of 6.5%. In the past decade, there have been few quarters where gross domestic product grew at even 3%. Forecasts for 2021 and 2022 were revised higher after Congress approved $1.9 trillion in fiscal spending, on top of an earlier $900 billion package late last year.

That money is now making its way through the economy. Bank of America’s credit card data shows a 67% surge of card spending over last year in the seven days ending April 3, fueled by government stimulus checks and reopenings. But that compares to a bleak period when consumers were in lockdown and frightened by the spreading virus. However, spending is still up 20% over the same period two years ago.

“This economy isn’t coming back. It is back,” said Tom Gimbel, CEO and founder of LaSalle Network, a Chicago-based recruitment firm. The first signs of the economic blast-off showed up in March’s better than expected increase of 913,000 jobs.

“I tell you this is the most optimistic job market I’ve ever seen. The only thing that causes it not to be great is Covid,” Gimble said. Once the vaccine is rolled out to mostly everyone who wants it this spring, the hiring picture will be even better, he said. Hiring is also complicated by Covid, and virtual workforce hires don’t always work out.

As it is, he said jobs are hard to fill, and some employers are counter bidding for workers with the right skills. He said many jobs are going unfilled because qualified workers are in low supply. Hiring by the restaurant and hospitality industry is still depressed but it could recover further with more reopenings.

The Labor Department’s job opening data showed openings of 7.4 million as of the end of February, the highest level since January 2019 and 5.1% above the pre-pandemic level.

“What [Jamie Dimon] said in his letter is right,” said Gimbel. “This economy is going to be on steroids for the rest of this year and next year.”

JP Morgan CEO Dimon commented at length on the economy in his annual letter to shareholders Wednesday, and his remarks echoed what many economists expect.

“I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom,” Dimon wrote. “This boom could easily run into 2023 because all the spending could extend well into 2023.”

That contrasts to a year ago, when the economy abruptly shut down and there were no known vaccines. Travel came to a halt and so did dining out, and all other forms of entertainment outside the home. As much of the workforce as possible stayed home, and cities and office parks became ghost towns.

Now, one in five Americans are fully vaccinated. More restrictions are being lifted and more people are flying, dining out and staying in hotels. Bank of America estimates Americans have $3.5 trillion in bank accounts they didn’t have before the pandemic, both from government checks and savings. That money could start flowing into the economy, as all kinds of businesses, from restaurants to gyms, see surges this summer from pent up demand.

The unemployment rate is still a high 6%, but economist Ed Hyman, chairman of Evercore ISI, says it could fall to 3%, below the pre-pandemic low of 3.5%.

“From trucking to job openings, US economic data have lifted off,” Hyman wrote in a note this week. Evercore’s trucking survey suggests more job openings.

The consumer-driven service sector is about to see a demand surge, while the manufacturing side of the economy has already been firing on all cylinders. The Institute of Supply Management manufacturing survey jumped to 64.7 in March, a 38-year high.

Hyman added Evercore’s tech index is at a decade high. The tech index is based on a bi-weekly survey of sales activity of five tech companies that manufacture equipment and software.

Diane Swonk, chief economist at Grant Thornton, said she expects 2021’s growth rate to be 6.6%, the strongest year since 1984. She expects a pace of 4.3% annualized pace of growth for gross domestic product in 2022.

She said she has not yet added any infrastructure spending proposed by President Joe Biden, as it has not been approved and its impact may not show up for awhile. But the other stimulus has already made some impact on the economy, and economists have already boosted the growth forecasts for this year and next.

The $1.9 trillion Covid relief program, signed into law last month, provided $1,400 to individuals plus money for schools and local and state governments.

“You have two years at least of catch up, and it takes governments a while to spend money. You don’t fall off a cliff even though the money was already allocated,” she said.

The forecast for the current quarter has been rising, and the CNBC/Moody’s Analytics Rapid Update of economists forecasts now puts it at a 10% growth pace, up from 9.5% earlier this month.

Swonk said she expects the hiring data to surge once the vaccine is rolled out further.

“I’m estimating the participation rate surges back up, once people’s kids can return to school,” she said. “They will return to the labor market.”

She noted there is some question about whether expanded unemployment benefits are keeping some workers from returning to work. “The real issue is fear and getting people vaccinated. We do have a high reservation wage. There is a debate [about it ] that I don’t think is unreasonable,” she said.

Swonk said the spread of variants of Covid is a risk to the economy, and it is specificially hitting individuals in the 30 to 50 year old group, a key part of the workforce.

Another risk to the recovery could be the potential for a tightening of Fed policy, which for now looks unlikely to change. But as the economy booms, the Fed could worry about overheating and inflation.

The producer price index sent a worrisome sign Friday. The index rose 1% in March, twice gain expected in producer inflation.

Fed Chairman Jerome Powell has gone out of his way to stress the Fed will keep policy low, and that he expects a transient jump in inflation in the spring.

Hyman, in his note, said it’s possible inflation could rise to 3%. The personal consumption expenditures price index, watched by the Fed, was up 1.6% on an annual basis in February, and JP Morgan economists expect it to rise to 1.8% in March.

Powell has said higher inflation should show up this spring because of the base effect, compared to last year’s weak numbers. He said inflation should be transitory, and bottlenecks in supplies should be temporary.

Powell, in comments at an IMF forum Thursday, reiterated that inflation has been low for 25 years, and that trend should continue. He also said the Fed could use its tools, meaning raise interest rates if inflation does look threatening.

The booming economy could also bring in some amount of wage inflation, in addition to pressures on the price of goods and services. Employment data does not currently show much in the way of gains, but hiring is expected to surge and job creation could top 1 million for each of the next several months, according to economists’ projections.

“In 25 years, we’ve never seen this many jobs, and it’s not just me,” said Gimbel. “I’m talking to my peers at other companies. What you’re seeing is companies are paying more.”