US, WASHINGTON (ORDO NEWS) — The data for March 2021, according to the author, indicate an undoubted economic recovery after the disruption due to COVID-19. He even talks about an economic boom, especially in industry. But what do these numbers mean in reality? And will this boom benefit – and to what extent – most people?
For much of the past year, I’ve argued that the cyclical recovery from the COVID-19 disruption will be stronger than many expect. In this forecast, I focused on the cyclical (rather than structural) nature of the current crisis: it has always been clear that quarantines are being introduced temporarily; safe and effective vaccines have entered the market at an unprecedented rate; and governments have duly responded to this shock with impressive levels of monetary and fiscal stimulus.
Judging by the recently published indicators of global economic activity, this forecast is now coming true. Data for March 2021 shows an undeniable economic boom, especially in industry. The rally may be even stronger than I expected: by the end of March, the S&P 500 for the first time in history exceeded the 4,000 mark.
The question, of course, is what will happen next. Will this boom last long? To answer this question, we need to start with the latest data. Among the most interesting March figures is the PMI index of business activity published by the American Institute of Procurement Management (ISM): it increased by 3.9 points relative to February and reached the level of 64.7. The index was published on April 1; and, if this is not a joke, this is the highest rate since 1983.
In addition, specific components of the US PMI also show strong growth in economic activity. As I explained in previous articles, two of my five favorite high-frequency indicators are found in ISM data – the total and the difference between new orders and stock levels. The stronger the number of new orders relative to inventory, the better the outlook for the short term. The March numbers foreshadow an extremely positive development over the next three to six months (although, of course, this development will depend on other events as well).
The USA is not alone. The newest PMIs published in other countries and regions are also very strong. Canadian and UK PMIs published by IHS-Markit were the highest in a decade and far outperformed consensus; many continental European countries also saw PMI record growth, even in some of the countries experiencing a new surge in COVID-19 cases. The PMI for the eurozone as a whole rose to its highest level in the bloc’s 24-year history.
Another high frequency indicator to watch out for is South Korea’s export statistics. It follows from it that in March exports increased by 16.6% compared to March last year; this is the strongest growth since 2018. There is little doubt that such positive news bodes well for strong trade statistics from other countries that will soon be released. In addition, the monthly index of business confidence in Belgium in March rose to a level higher than its value on the eve of the pandemic. And this index is known as a good predictive indicator for the whole of Europe, given the high degree of trade openness in Belgium.
Soon we will receive another signal: China’s statistics for the first quarter will be published. GDP growth (year on year) is expected to be as high as 18%. Taken together, these indicators foreshadow a couple of strong quarters in terms of real (inflation-adjusted) GDP growth in many countries around the world.
But what do these numbers mean in reality? Is it possible that they are simply due to the effect of statistical comparisons with last year, or the effect of deferred demand, which will weaken after the vaccination and the abolition of quarantines?
Much will depend on economic policy. If governments and central banks become concerned about the appropriateness of maintaining generous fiscal and monetary conditions, then they will begin to tighten the screws and financial markets will remain unpredictable.
In addition, these short-term concerns do not address more serious structural issues such as climate change, the state of public finances, and the Sino-American controversy. There is another important question: will the current boom benefit – and to what extent – most people. Current cyclical indicators suggest that median households will receive more than commonly believed (and will, at least for a while).
This is why I don’t think the short-term bounce will be just a statistical phenomenon due to the low base of 2020. Rather, it will be the result of strong increases in forced savings, monetary and fiscal stimulus, and the generosity of targeted bailout programs. The answer to the question of how long this will last will depend on a complex combination of factors, including the speed at which personal savings are spent, the continuation (or suspension) of government support measures, inflation signals, and the behavior of markets for which , in turn, will affect all of the above.
Oddly enough, despite good economic statistics, market conditions became more difficult after US President Joe Biden moved into the White House. Bond markets are likely heading for a repeat of the 1994 mini bearish episode, adding to the spice of the strong industry rotation seen in the stock market. Let’s hope the high inflation doesn’t come back. If that happens, all of today’s good news is likely to be fleeting.
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