The confluence of accelerated COVID-19 vaccination rates, a more fully opened economy, and direct stimulus checks to households is starting to show up in our traditionally tracked economic data, consistent with real-time data (see "U.S. Real-Time Data: Poised To Spring Ahead Amid Widespread Vaccine Rollouts," April 12, 2021).

In March, consumer spending surged, together with increased housing activity and industrial production--altogether reconfirming signals that the economic recovery accelerated heading into the second quarter. Demand for goods remained strong with an above-expectation pickup in retail sales. Industrial production rebounded strongly after a weather-induced February pause (and despite a chips shortage in the auto sector and shipping delays), and housing construction maintained its robust pace. Demand in the housing market showed some signs of moderating but was still hot compared with pre-pandemic levels. Sales of existing homes were down for the month, but sales of new homes soared.

Initial (first-time) jobless claims dropped 39,000 to a new cycle low of 547,000 in the week that included April 12 (Bureau of Labor Statistics survey), extending a sharper decline of 156,000 a week earlier. This indicates to us that April's payroll job gains likely exceeded 1 million (see table 2). A broad measure of first-time U.S. state jobless claims (the sum of claims under regular state programs and the Pandemic Unemployment Assistance program) fell to 898,000 (non-seasonally adjusted)--yet another signal of growing economic momentum.

Chart 1

U.S. households have good reason to be optimistic. With 916,000 job gains this March and a drop in initial jobless claims to a postvirus low, the jobs market is improving. We expect U.S. economic growth to surge to 11.3% (annualized), its highest rate in 37 years, with solid gains in the second quarter, following solid 6.4% growth (S&P Global Economics' forecast) in the first quarter. In tandem, we expect a shift to more balanced growth, supported by an increasing share of expenditure on services as summer brings even higher vaccination rates, wider reopening, and households ready to spend.

Chart 2

Content Consumers Continue To Buy

The Department of the Treasury began disbursing stimulus payments mid-March, and by the end of the month, $335 billion (more than four-fifths of the authorized $410 billion estimated by the Joint Committee on Taxation and the Committee for a Responsible Federal Budget) had been doled out to households. Add springlike weather and vaccinations to extra purchasing power, and American households didn't hesitate to go on a spending spree.

Retail sales (not adjusted for inflation) increased by 9.8% month over month in March, a near-record-high surge exceeded only by the one tied to the reopening of the economy in May 2020, after the first lockdowns. March sales were more than twice as strong as our expectation and 17% above their pre-pandemic level.

Chart 3

Motor vehicles led the growth in retail sales, rising 15% from February, while the segment excluding auto components grew by 8.5%, with every broad subcomponent gaining during the month. Sales at every type of retailer other than food services (restaurants) are now 2%-44% above pre-pandemic levels. Sales for food services and drinking places rose 13.4% in March and were only 4.8% shy of their level in February 2020. As we have long anticipated, March likely marked the beginning of a faster recovery for restaurants as a greater portion of the population becomes vaccinated and comfortable with dining out, especially outdoors.

We also like to look at the retail sales control group, which excludes sales of automobiles, building supplies, and gas stations and is fed directly into GDP. This group rose 6.9% in March following a 3.5% decline in February. This was consistent with slightly above-forecast inflation-adjusted personal consumption expenditure growth of 5.1% (S&P Global Economics' forecast) in the first quarter.

April is likely to see a continuation of retail sales growth (as stimulus checks reached consumer pockets only in the second half of March), but we also may see some payback from current spikes in May. The second half of the year should maintain robust consumer spending as some households are set to get another influx of cash from the temporary expansion of the Child Tax Credit, even as overall stimulus is fading. Accumulated excess savings, combined with the expected full reopening of the service economy this summer, also support our forecast for a consumer spending boom this year of near 7%.

We still expect a spending shift from goods back to services to be gradual. The proportional spend on goods will likely peak in second-quarter 2021 at approximately 40%, before a shift back to services at a decelerating pace--not returning to the pre-pandemic split (36%/64%) for several years.

Housing Remains Strong

It's partly because of the strength in home sales that we are seeing such robust growth in durable goods sales (as seen in retail sales) during this recovery.

Housing activities remained unambiguously strong in March, despite signs of slowing in existing home sales (which edged down for two consecutive months but are well above their 2018-2019 average) and mortgage applications. New housing starts jumped 19.3%, from a weather-related 11.3% decline in February, to a 1.74 million annual pace in March, and building permits (forward-looking data for groundbreakings) rose 2.7% to a 1.77 million annual pace. Single-family starts rose sharply to 1.24 million in March, up by 15.3% from the prior month. Single-family permits rose by 4.6% month over month, reaching 1.2 million in March.

To match new construction, new home sales jumped 20.7% in March, more than offsetting their 16.2% weather-related decline in February, to a 1.02 million annualized pace. With this rise, it's no surprise that homebuilders are very optimistic about the housing market at present and in the next six months. The early April National Assn. of Homebuilders Index edged up to 83, from 82 in the previous month. Homebuilders have maintained high optimism despite facing rising costs of construction amid a doubling of lumber prices and higher costs of other building materials. And that's because with strong demand and low inventories, contractors are passing their higher costs to homebuyers, who are readily paying up. Index components for single-family present sales and sales in the next six months stayed above 80, at 88 and 81, respectively.

The inventory of homes for sale is very low, and homebuilders are ramping up construction in an attempt to meet demand. The supply of single-family new homes at the current pace of sales is 3.6 months, below the average during 2002-2006, leading up to the housing crash. Existing housing inventory inched up to 1.07 million units, up by 3.9% from February but still at a historical low (since 1982). The month's supply of homes rose to 2.1 in March from 2.0 in February. The median sale price for home resales surged 5.9% to an all-time high of $329,100.

Chart 4

After declining for six consecutive weeks, mortgage applications shot up 8.6% in the week ended April 16. The strong rebound stemmed from a decline in long-term interest rates, with 30-year fixed rates, at 2.97% for the week ended April 22, finally trending down after peaking at 3.18% at the start of April. This was accompanied by a decline in the 10-year Treasury yield from its peak of 1.72% at the start of April, after consecutive increases since August last year.

Cyclical factors associated with the economic rebound, such as rising employment, rising disposable incomes, and very low mortgage rates, are boosting housing demand. Supply running behind demand has led to rapid increases in home prices. The S&P/Case-Shiller National Home Price Index was up over 24% in the past year. Structural drivers of demand, underpinned by demographic factors, are also positive, with demand for housing among individuals aged 25-34 on the rise, while the work-at-home trend and increased perceived mobility are also boosting demand. On the other hand, anecdotal evidence suggests older folks are now more inclined to stay at home for longer, given the recent memory of the pandemic, thus crimping one important channel of supply of homes for sale.

Industry Resurges

Industrial activity (manufacturing, mining, and utilities combined) recovered firmly in March after a weather- and supply-related pause in February, up 1.4% month over month after sliding 2.6% in the previous month. After recouping a bit more than half of the losses sustained from February's harsh winter weather, with March's gains, industrial production remains 3.3% below its pre-pandemic level.

Stronger energy demand led mining activity to gain 5.7% over the month. Utilities lagged under the weight of warmer weather. The manufacturing sector advanced 2.7%, underpinned by a strong 3.0% expansion from durable goods and a 2.6% gain from nondurable goods. Capacity utilization inched up to 74.4%, still 3.4 percentage points lower than the 2019 average, while manufacturing industry capacity utilization was 73.8%, just 1.8 percentage points below the pre-pandemic level.

The industrial expansion further cements that the economy is on strong footing at the start of the second quarter. The regional surveys from New York and Philadelphia--leading indicators of manufacturing--both showed machines remain hot. April's Philadelphia Fed Current Activity Index increased to a 48-year high at 50.2, from 44.5 in March. The Empire State Index increased 9 points to 26.3 in April, a three-year high. Shipments and orders subindexes both indicated buoyant future activity. Further out, booming global demand, a likely increase in infrastructure spending, and a pickup in business investment will propel industrial sector growth.

Table 1

Table 2