May 7, 2021
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The latest round of $1,400 tax stimulus checks sharply boosted retail sales in March. And if that is not enough, the virus is rapidly getting under control and some epidemiologists expect herd immunity to be achieved by May. Given all of that, we got GDP growth rate for the first quarter of 6.4%, We expect 10.0% growth in the second quarter, and GDP growth for 2021 of 8.0% followed by 4.8% GDP growth in 2022.
If that path is correct GDP will get back to its pre-pandemic level in the second quarter. However, the Fed seems to be comparing it to some projected growth path that it would have presumably attained if the recession had never occurred. On that basis, GDP will completely erase the impact of the recession in Q4 of this year.
Given the GDP forecast above, we expect the unemployment rate to decline to 4.1% by the end of this year, and to 3.6% by the end of 2022.
Given the recent rapid increase in money supply growth, he core inflation rate should rise from 1.6% last year to 2.4% in 2021 and 3.0% in 2022.
The Fed has pledged to keep the funds rate at 0% through 2023. A moderate pickup in the core CPI should boost the 10-year note rate from 1.6% currently to 1.8% by the end of 2021 and 2.3% by the end of 2022.
Stephen Slifer
NumberNomics
Charleston, SC
Steve –
How tight will be the linkage between transient inflation in the second quarter
to 5.3% and the 30 year Treasury rate?
Hi Frank,
I was trying to figure out what you meant by transient inflation in the second quarter of 5.3%. But then I went to the forecast table and there it was! Your eagle eyes picked up something that didn’t look right and questioned it. It turns out that the correct number is 3.6%. I just updated the table so it is now correct. Thanks for catching it!
I think for bond yields to move higher we probably need some sign that GDP growth is going to be a lot stronger than people believe at the moment, or that the actual CPI data in the months ahead show more upward pressure than they anticipate. Right now those inflation expectations for the next 10-years (measured as the difference between the nominal yield on the 10-year and its inflation-adjusted equivalent) is 2.3%. If it gets higher than that bond yields will likely climb a bit. By yearend I am looking for them to climb slightly from 1.6% today to 1.8% by yearend. Higher, but still very low historically.
Best.
Steve