Economic Letter

Economic Commentary April 2021

By Patrick Pascal

April, 2021


In 2020, U.S. GDP indicated the worst performance in seventy-four years, contracting by 3.5%–a figure that last spring and summer seemed unachievably moderate. GDP forecasts for 2021 are currently around 6 to 7% and rising. According to the University of Michigan, March consumer sentiment increased at the highest rate seen in the last eight years.

The 2021 first quarter’s performance was as erose as any in modern history. January saw personal income climb 10.1%, followed by a February decline of 7.1%, reflecting smaller coronavirus relief payments. Credit card spending with Bank of America surged 67% in late March. The spending in that period was also 20% higher than in the same period of 2019.

A third ($1.9 trillion) round of stimulus in March will result in another strong performance for the quarter’s third month. March retail sales rose 9.8% vs expectations of 6%. Retail sales were up 28% from depressed year-ago levels.

The most recent Federal Reserve Beige Book report indicated that “national economic activity accelerated to a moderate pace from late February to early April.” The Fed said the economy grew in all twelve Fed regions. In the present second quarter, GDP growth of more than 10% is possible. In the same quarter last year, with the economic shutdown, GDP decreased 33.3%.

U.S. Households are presently sitting on an estimated $2 trillion in excess savings. In March, another 160 million direct payments (totaling $375 billion) have been paid to households. Concerns that government support and accommodative interest rate policies could stoke inflation are starting to appear. Fed officials have made clear that, as the outlook brightens, the U.S. economy will continue to need aggressive monetary policy support.


Fed Chair Jerome Powell recently stated that inflation over the coming year will be “neither particularly large nor persistent.”Interest-rate observers will be following these figures quite closely—particularly when considered against Fed statements that they don’t expect to raise interest rates before the end of 2023. The pace of inflation, as measured by the Consumer Price Index, jumped to
a 2 1/2-year high of 2.6% in March. The cost of imports also rose strongly again in March—adding to growing inflationary pressures for a host of goods ranging from lumber to computer chips to new cars.

According to the Boston Fed’s recent report, “Businesses also expressed concern about rising inflation over the rest of the year.” This month, Coca Cola, Procter & Gamble, Kimberly-Clark, and J. M. Smucker all announced price increases as they pass on higher input prices. The global shortage of semiconductor chips—fundamental to data centers, modern autos, and countless digital devices—has added to this risk. Over the past twelve months, import prices have climbed 6.9%. With demand remaining high and little additional chip-making capacity expected in the short term, the shortage could last into next year.

With markets expecting “neither large nor persistent” inflation, while nascent and anecdotal evidence points to higher prices, we presently prefer to keep our fixed income durations shorter than our peers.


As strongly as the economy has begun to recover, nothing quite compares to the recovery in equity markets. From the lows of late-March 2020 to the recent highs of this April, the S&P 500 Index has rallied over 91%. These recent highs are 24% higher than the pre-pandemic highs at the beginning of last year.

Much of the excess liquidity of the globally accommodative monetary and fiscal policies during the pandemic has found its way into present equity valuations. Additionally, anecdotal evidence suggests that new, less-sophisticated investors have become participants driving the valuations of some companies and sectors to unjustifiable levels. Trading vehicles like Robinhood combined with chat platforms such as Reddit have resulted in shares of companies such as GameStop (with no earnings) to rise from under $18/share to almost $350/share in just one month and to then fall back 90% the following month.

While GameStop is an extreme example of this dynamic, there are others. Such excess liquidity is also contributing to high valuations within other assets like cybercurrencies and housing. These asset classes will require careful consideration as the stimuli are ended. Reflecting on how resilient our economy and financial markets have proven over the past fourteen months renews one’s faith in the long-term prospects for future prosperity.

The opinions expressed are for general informational purposes only and are not intended to provide specific recommendations or advice on any specific security or investment product. It is only intended to provide education about investment issues.