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Economic Update: May 3, 2021


Chief Global Strategist for J.P. Morgan Funds


1Q21 real GDP grew at a 6.4% q/q seasonally adjusted annual rate. Increases were broad based, with the exception of trade and inventories. Personal consumption, the largest part of the economy, surged an annualized 10.7%, the second-fastest pace since the 1960s. Economic output is now only 0.9% below peak 4Q19 real GDP, and an inventory rebound could set the stage for a double-digit surge in real GDP in the second quarter. Recent U.S. economic data have also shown that U.S. growth is set to surge, with a very bullish ISM Manufacturing PMI at 64.7%, a 37-year high, and the ISM Services PMI at an all-time high of 63.7. Markit Flash PMIs for April also rose to record levels, 63.1 for services and 60.6 for manufacturing.


The March Jobs report was much stronger than expected and suggests an even more powerful recovery than implied by the Fed’s recently upgraded outlooks. Non-farm payrolls rose 916,000 in March, well ahead of a consensus expectation of +658,000. With these job gains, the U.S. has now recovered 14.0 million, or 62%, of the 22.4 million jobs lost in the pandemic. The unemployment rate fell to 6.0% from 6.2%, in line with consensus expectations, and the labor force rose by 347,000 in March, showing a continued decline in pandemic effects on the labor market. Initial jobless claims for the week ended April 24 fell to 553k (cons. 540k), the lowest level since the onslaught of the pandemic.


The 1Q21 earnings season has been impressive, with 286 companies having reported (72.6% of market cap). Our current estimate for 1Q21 earnings is $45.78. Thus far, 86% of companies have beaten on EPS estimates, and 73% have beaten on revenue estimates. Many companies have now recovered to the revenue/EPS levels of 2019 and are setting fresh highs. Blowout reports from big tech also highlight how the pandemic has accelerated key secular growth themes. Oil prices (+48% y/y) and the U.S. dollar (-7% y/y) have provided additional tailwinds to earnings. However, elevated expectations and valuations have caused market recovery plays to pause, awaiting new catalysts.


Inflation has now reached the FOMC’s 2% target, as the headline PCE price index rose +0.5% m/m and +2.3% y/y in March. The core PCE deflator also accelerated to +0.4% m/m and +1.8% y/y, matching market expectations. Headline CPI for March was a little stronger than expected, rising +0.6% m/m and +2.6% y/y, while core inflation rose +0.6% m/m and +1.6% y/y. Energy was a main contributor to higher inflation, as prices rose +5.0% m/m.


The FOMC maintained the federal funds target rate in a range of 0.00%-0.25% and left the pace of asset purchases unchanged. In addition, the median federal funds rate outlook—as measured by the “dot plot”—continues to imply no rate adjustments through 2023. Chairman Powell pushed back on tapering chatter and reiterated their view that higher inflation over the next few months will be transitory and thus not meet the threshold for tighter policy. Powell acknowledged the improved growth backdrop, but said that they will need to see it persists to give the Fed comfort about achieving “substantial progress.” The Fed also continued to underscore “risks to the outlook” from the coronavirus pandemic.


  • The emergence of COVID-19 variants and vaccine delays could slow the economic reopening.
  • Inflation could spike in the medium term.
  • Rising yields could foment equity market volatility.

Investment Themes

  • U.S. equity investors can benefit from the recovery with cyclical exposure.
  • Fixed income investors may underweight bonds and maintain short duration in a rising rate environment.
  • Long-term growth prospects and cyclicality support international equities.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

Originally Posted on May 3, 2021

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