The U.S. economy thrived in the first half of the year, posting stellar GDP growth not often seen for an economy of this size. However, much of that growth was powered by consumers receiving direct cash from Uncle Sam.
Of course, that won’t go on forever, and some economists are saying the effects of stimulus are already waning. That means investors need to prepare for what post-stimulus economic growth could look like.
“After the stimulus checks are spent and the pent-up consumer demand from the pandemic has been satisfied, can the economy sustain its strong growth?,” notes Nationwide’s Ben Ayers. “There are several reasons to think that boom conditions can extend into the first half of 2022, led by strong drivers for consumer spending. As such, we see the economy growing at the fastest rate in nearly 40 years during 2021, with further above-trend growth in 2022 as the economy moves toward a full recovery from the COVID-19 recession.”
As many investors already know, one of the most important economic data points is jobs. Market participants get regular updates on that front by way of the weekly jobless claims numbers and the monthly employment report from the Labor Department.
At a time when inflation is taking off, employment data takes on added importance because many workers are still out of the workforce, and so dire is the situation that many employers are offering heavy sign-on bonuses and other incentives to get folks into jobs. Problem is those costs are passed onto customers, leading to inflation. Fortunately, relief could be on the way.
“We expect that the economy could add more than 6 million jobs during 2021 — replacing many job losses remaining from 2020. These strong job gains drive positive feedback loops for economic growth as households spend their higher incomes, in turn leading to further hiring by businesses,” adds Ayers.
Another critical point is remembering that roughly two-thirds of U.S. GDP is driven by consumer spending, and plenty of consumers have been shoring up their personal balance sheets over the course of the coronavirus pandemic. Normalizing spending patterns could be a boon for economic growth.
“If the saving rate drops to pre-COVID levels over the next year, it could create an additional $1.2 trillion in spending capacity for the economy,” notes Ayers. “More households may dip into savings to fund the vacation that was postponed by the pandemic or to make further upgrades around the house. The effect on spending from elevated savings should help extend a strong pace of consumer spending through the rest of the year and beyond.”
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