Kevin Kahovec and Mary Kate McGovern talk at Rizzo’s Bar & Inn in Wrigleyville as restrictions for the coronavirus disease (COVID-19) have been relaxed in Chicago, Illinois, March 6, 2021.
Eileen T. Meslar | Reuters
The country’s economic growth is boosted in the second quarter as parts of the economy most affected by the pandemic reopen.
Never before has the services sector plunged the US into recession. Nor have so many trillions of dollars in stimulus measures been applied.
But with more vaccinated Americans and more states reopening operations, the economy could sizzle as retailers, restaurants, hotels, gyms and other service-oriented businesses see a sudden surge in demand.
The stock market has been trading higher on these expectations for months. However, if the strong activity results in a better earnings outlook, this could further fuel the rally. The S&P 500 traded at an all-time high on Thursday, passing 4,000 for the first time when the new quarter began.
“Some of it is factored in, and if there is a risk, it’s on the upside rather than the bottom,” said Sam Stovall, chief investment strategist at CFRA. “From an economic point of view, we could underestimate it and that could give the stock market a bit of a boost unless interest rates rise even further.”
Stovall said the second quarter is often positive for stocks, and the S&P 500 has made an average of 2.8% gains in the quarter since 1990.
Shares ended the quarter higher nearly two-thirds of the time. The S&P 500 ended the first quarter with a 5.8% gain.
Economists predict that gross domestic product grew by an average of 5.4% in the first quarter, which ended Wednesday. But the estimates for the second quarter are much higher and rising.
The median second-quarter GDP growth forecast is now 9.3%, according to the The Washington City Times / Moody’s Analytics Rapid Update of Economists’ Forecasts.
“The consumer is the big story. It’s not just the stimulus bills … It’s the leftover stimulus money stacked in bank accounts,” said Ethan Harris, head of Global Economic Research at Bank of America.
The last two Covid bills passed by Congress paid $ 600 to individuals in early January and an additional $ 1,400 in March.
“We think there is $ 3.5 trillion in bank accounts above the normal level.” Harris said. He said the calculation is based on estimates of what deposits will be once the last round of stimulus hits the economy, as well as the trend in deposits.
The Conference Board’s Consumer Confidence Index rose 19.3 points to 109.7 in March, one of the largest increases on record. It is the highest confidence level of the pandemic era.
“It’s a big blank check for consumers, depending on how much they want to spend in the coming quarters. This quarter, reopenings should accelerate, so the deployment of all this liquidity is also accelerating,” Harris said. from Bank of America.
“The pent-up demand will come pretty soon,” he said. “The only thing that will put some sand in the gears for the next month is that the Covid cases are picking up again.”
Harris said the recovery in the coming month may be impacted by the increase in Covid cases, but it shouldn’t slow the economy down much unless hospitalization starts to rise.
He expects June to be the hottest month for the economy as the weather warms and more people are vaccinated.
The economy was hit in the first quarter by unusually cold weather in Texas and parts of the South, which caused power outages and halted energy production.
“That turned us back a little bit … You’ll see that the real unleashing of pent-up demand really picks up in the second quarter as more people get vaccinated. It’s a bit too euphoric,” said Diane Swonk, chief. economist at Grant Thornton.
The second quarter is likely to be the best quarter of the year. “We are approaching 10% growth,” said Swonk.
“The summer will be great, but in the second quarter you really get a boost and you just add to that,” she said. “We will have the strongest year since 1984, after the worst year since 1946 when soldiers came back from World War II. The good news is that there will be some expenses that will end in 2022.”
The recovery in good spending will boost service spending, Swonk said.
Consumers are indeed starting to travel again.
Weekly hotel occupancy was 58.9% for the week of March 14 to March 20, according to data from STR, a research firm that deals with the hospitality industry.
That is the highest level since the beginning of March 2020.
Harris of Bank of America expects economic growth of 10% in the second quarter, followed by 9% in the third. That should decrease to 5% by the fourth quarter and then to 4% in 2022.
“The question is how much leftover purchasing power is still driving growth,” he said. “To what extent do people have all that wealth and savings on their balance sheet.”
Harris said if the burst in consumer spending starts to slow down, business should help the economy maintain momentum. “As you move forward a little bit, the investment side starts to become more important,” he said. “Business confidence continues to grow while the economy is thriving.”
Equity strategists expect the trajectory for the market to be higher, but gains are not expected to be as fast as before.
“You could let the market rise marginally, but the multiples fall because earnings growth will outpace,” said Steven DeSanctis, Jefferies equity strategist. “You’ve already priced in all the good news, so you need good news step by step, whether it will be better than expected.”
DeSanctis said he expects the earnings outlook to be revised higher.