U.S. gross domestic product jumped 6.4% in the first quarter of 2021. Greg Daco, Oxford Economics Chief US Economist, joins Yahoo Finance Live to weigh in.
Video Transcript
MYLES UDLAND: All right, let's stay on the Fed, broaden it out, talk more about the state of the US economy on the wake-- or in the wake, rather, of that GDP data we got out earlier this morning. Greg Daco joins us now. He's the Chief US Economist over at Oxford Economics.
Greg, let's just finish up the Fed conversation, then we'll get to some of the other data. As you saw the meeting yesterday, and the pointed questions are around tapering and will the Fed change its stance there, how are you guys thinking about that issue today? And are your clients basically asking a version of that question is, are all the eyes right now on the asset purchase program from the Fed?
GREG DACO: Yes, I think all eyes right now are on what the Fed's next move is going to be. I think Powell is going out of his way to make sure that we're not considering any tightening or any imminent tightening of Fed monetary policy. But that is the big question that everybody's asking, when will asset purchases start to be tapered? When will be the first rate hike from the Fed?
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We think that's still some ways away. We think that QE tapering will occur over the course of 2022. We think that perhaps the Jackson Hole Symposium might be a good opportunity for the Fed to signal that tapering coming in 2022. And we think the first rate hike won't occur before 2023. But the big and important question is also, how much stimulus, fiscal stimulus, will be pumped into the economy over the next few months, because that's going to determine not only the pace of economic activity, but also the pace of inflation.
JULIE HYMAN: Well, Greg, it's Julie here. Of course, we got an outline of what the president, at least, wants that fiscal stimulus to look like over the next several months, and not just the next several months, but over the next coming years. But as an economist, how are you sort of gaming out what that's going to look like, especially given the political obstacles to getting the full plan that he's talking about enacted?
GREG DACO: Well, I think what we're looking at is essentially a shift of fiscal policy stimulus from cyclical stimulus to structural stimulus. We had a lot of stimulus that was pumped in over the past year, over $5 trillion of cyclical stimulus, with the last one being the American Rescue Plan. Now the administration is really turning towards structural stimulus, essentially trying to lift the economy's potential by increasing capital investment by ensuring that we have a strong and robust labor market and ensuring that we invest in human capital.
The next two measures, the American Jobs Plan and the American Families Plan, are aimed at doing exactly that. The key question is how much they'll be able to lift the supply and avoid an inflationary environment, whereby we have too much fiscal stimulus being pumped into the economy and that leads to inflationary pressures that may force the Fed's hand into tightening earlier than it wants to.
BRIAN SOZZI: Greg, President Biden noting last night America is ready for takeoff. But if I look at some of the GDP estimates out there on the Street, GDP is about ready to-- really, the growth rate is going to slow significantly later this year and into next year. I mean, do you think the Street is underpricing the economic recovery?
GREG DACO: I don't think so. I think if you look at the path of the economy right now, we've passed an inflection point. We had a fairly strong GDP growth figure at 6.4% in the first quarter. The miss in terms of our estimate was largely due to a larger-than-expected inventory drag, and that's a good sign. That's a sign that, essentially, inventories are being depleted by strong demand.
So it's overall a fairly good sign. We expect growth in the second quarter to be around 13%, 14% annualized. And we expect the year to be around 7 and 1/2% in terms of overall economic growth, which would likely be the strongest performance since the 1950s.
So we are on this strong path in terms of recovery. We're likely to actually exceed the pre-COVID path, not just the level of GDP, but the pre-COVID path of GDP by the third quarter of this year on a lot of fiscal stimulus. But there's no doubt that the cyclical impulse, fiscal impulse, is going to diminish, and we're not going to see double-digit growth figures forever in the US economy.
JULIE HYMAN: And I like that sort of spring bloom, summer boom prediction that we were just showing on a chart that you brought us, Greg. Let's dig a little bit more into this morning's GDP data as it regards your forecast, because the headline number 6.4%. But as you mentioned, really strong numbers on goods consumption, right. That was reflected in the low inventories.
23.6% on goods-- increase in goods. Spending, though, on services up by 4.6%. And there's been a lot of talk about that flipping in the second half of the year. What is-- as you dig down into GDP, what is that spending on services going to look like in the second half of the year?
GREG DACO: Yeah, I mean, the first quarter numbers were exactly as we saw numbers in the second half of 2020, where there was still a lot of stimulus being pumped into the economy and a lot of that stimulus was geared towards spending on both durable goods and nondurable goods, which performed very well in the first quarter. When we look at the data, even as of April, we're already seeing signs that spending is rotating towards more services sector spending.
And if you have a combination of healthy incomes, an environment in which virus fear is dissipating because of improving health conditions, and rapid vaccinations, and warmer weather, because that's a big factor in a COVID environment, all those factors are going to lead to stronger spending on service sector activities. And already we're starting to see people go out and dine more, go out and stay at hotels, travel more. All these indicators are on the rise and are big factors that are, as of April, supporting our Recovery Tracker, which is now in its seventh consecutive week of expansion since mid-March. So we're-- we're seeing very strong gains in terms of economic activity and that growth rotation tilting more towards the services sector.
MYLES UDLAND: And Greg, finally, maybe a little bit away from the conversation we're having here, but housing has really become a fascinating topic of conversation. Everybody has a view, because most everybody lives in a house or cares about where their dwelling is, so something like that. How are you guys thinking about the dynamic that housing could play in that, let's call it the post-COVID economy?
That chart we had up, that is growth above pre-COVID trend levels. We expect maybe some increase in rates. Affordability, because of supplies, is really getting squeezed. How does that all factor into, you know, maybe a longer-term vision of the economy you guys are thinking about?
GREG DACO: I think the housing sector is symptomatic of the COVID crisis, whereby individuals that have the income and the means to enter the housing market did so in search for greater space, more space. The housing sector has been really booming, and really boomed over the course of the second half of 2020 and even in the first quarter of this year. Even though growth slowed a little bit, it was still very strong.
But you are seeing a few factors that are important to keep in mind. As you mentioned, inflation is rising. Home prices are rising at record paces in some places. We're seeing interest rates having gradually increased. That's eroding affordability and endogenously will weigh on demand.
And at the same time, you have a supply response, because we know that input costs are rising on the housing front and you have difficulties sourcing the right type of labor. So those factors are going to respond gradually, and that's really symptomatic of this COVID crisis and COVID rebound. Demand has been very strong.
Supply is generally a little bit slower to respond. We'll see inflation in the meantime, but that will sort itself out, and we don't expect to see runaway inflation, broadly speaking, in the US economy. We will see firmer inflation than over the past decade, but not runaway, as supply responds to the strong demand.
MYLES UDLAND: All right, Greg Daco, Chief US Economist over at Oxford Economics. Greg, always great to get your thoughts. Thanks for jumping on. I know we'll talk soon.