Sign up to start a free trial today. Skip Navigation. Key Points. Gross domestic product is expected to accelerate 9. That's likely, however, to be the peak for pandemic-era growth Economists see a gradual reversion to the mean for the U. VIDEO 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. 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 for Supply Management manufacturing survey jumped to Hyman added Evercore's tech index is at a decade high.
The tech index is based on a biweekly survey of sales activity at five tech companies that manufacture equipment and software. Diane Swonk, chief economist at Grant Thornton, said she expects 's growth rate to be 6.
She expects a pace of 4. Swonk 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.
You don't fall off a cliff even though the money was already allocated," she said. Swonk noted there is some question about whether expanded unemployment benefits are keeping some workers from returning to work. We do have a high reservation wage. There was great concern about how it would impact economic activity. Hence, the high The high growth was no doubt helped by the absence of a stringent, nationwide lockdown as seen during the first wave.
However, it largely reflected the base effect of the unprecedented Since the contraction itself was reduced during the second, third and fourth quarters of , the base effect will also be weaker in these quarters. Hence the year-on-year growth may be progressively lower during the next three quarters. But that assumes no major adverse impact of a third covid wave, an optimistic assumption. Underlying the aggregate Q1 growth rates, there are significant inter-sectoral variations.
Agriculture was not much affected by the pandemic. It grew by 3. In industry, all sub-sectors registered very high growth during Q1, led by manufacturing and construction. Finally, it makes sense to spend less on durables. After all, how many big screen televisions, dishwashers, and treadmills can a family have in one home? That said, some of the decrease in spending on durables is due to troubles in the automotive industry, not due to lessening demand. Meanwhile, real spending on non-durable goods increased 0.
Real spending on services was up 0. However, despite strong growth in spending on services, real spending remains 1. In addition, the ECI was up 1. The gains varied by industry and by occupation. On a quarter-to-quarter basis, the ECI was up 1.
There was a stunning 7. Nonetheless, the ECI was up a more modest 0. By occupation, the quarterly ECI was up 1. Meanwhile, it was up 1. The acceleration in employment costs, especially wages, reflects the massive labor shortage that is vexing many businesses.
Still, the increases in wages have not kept pace with rising prices. In other words, real wages have declined in the past year on average. If wages continue to rise at a rapid pace, this could contribute to sustained higher inflation. However, if businesses invest sufficiently in labor-saving or labor-augmenting technologies, then worker productivity gains can offset higher wage costs, thereby nullifying the necessity of raising prices.
One measure of investor expectations of inflation is the breakeven rate. Here is how it is calculated. The US Treasury and other governments issues two types of bonds: ordinary bonds that promise that the principal will be fully repaid and Treasury Inflation Protected Securities TIPS; in the United States that promise that the principal will move in line with inflation.
Because investors are protected from inflation, the yield on TIPS is a real inflation-adjusted yield. Ordinary bonds provide a yield that, theoretically includes both the real return and investor expectations of inflation. Thus, the difference between the yields on ordinary and TIPS bonds is the investor expectation of inflation, also known as the breakeven rate.
In recent months, breakeven rates for five- and year bonds have been rising as investors became increasingly worried about the potential for longer-term inflation. This likely reflected investor expectations that the current high inflation would turn out to be transitory. Indeed, the five-year breakeven rate has lately exceeded the year breakeven rate, indicating that investors expect higher inflation in the short term than in the long term.
This is consistent with the story that current inflation will be transitory. For some time, I and other economists have argued that, if breakeven rates suddenly spike, then investors will have become worried and will have upwardly revised their expectations, possibly compelling central banks to tighten monetary policy faster than anticipated.
In the past two weeks, breakeven rates started to spike. That is, they increased sharply, suggesting that the market zeitgeist is shifting as business leaders increasingly bemoan the apparent persistence of inflation.
The supply chain problems in the global economy increasingly appear difficult to undo and the continuing rise in oil prices is a source of distress. Indeed, oil prices are now at the highest level since From October 19 through 22, the year breakeven increased from 2. The five-year breakeven increased from 2. Federal Reserve Chairman Powell was asked about this on October Supply constraints and elevated inflation are likely to last longer than previously expected and well into next year, and the same is true for pressure on wages.
If we were to see a risk of inflation moving persistently higher, we would certainly use our tools. However, he appeared to suggest that the definition of transitory is a bit more prolonged than previously believed. He also attempted to reassure investors that the Fed is prepared to change course if things get out of hand. Meanwhile, two-year US bond yields have risen sharply recently.
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