U.S. Markets close in 4 hrs 12 mins

Economy has less than 1% left to recover fully: BMO Economics

·Writer
·4 min read

According to third estimate data released by the Bureau of Economic Analysis (BEA), real GDP growth increased at an annual rate of 6.4%, or 1.6% not annualized, in Q1 of 2021. This is up from an advance estimate of 4% for Q4 of 2020.

“Meanwhile, the entire economy has less than 1% remaining to recover, as a slight majority of sectors (12 of 22) have now fully recovered,” a BMO Economics report stated. “The latter set is led by finance and insurance, with real output having advanced more than 7% since before the pandemic (2019 Q4). This was an industry that proved very amenable to working remotely and is benefiting from strong housing and equity markets, along with lots of saving.”

Five more industries have since recovered to real GDP levels past those in Q4 of 2019 since the previous quarter, when only seven industries had recovered. In this quarter, four industry groups—durable goods manufacturing (3.7%), professional, scientific and technical services (2.8%), information (3.4%), and administrative and waste management services (5.4%)—account for half the total growth in the quarter but represent less than a quarter of GDP. These industries were able to leverage the momentum of the economic rebound, with some doing so in spite of supply shortages and disruptions.

Other strong sectors included arts, entertainment, and recreation (8%) as well as accommodation and food services (4%)—two industries which were greatly impacted by restrictions during the pandemic. However, they both need to recover real GDP by 34.6% 19.9%, respectively, in order to return to Q4 2019 levels.

“Looking ahead to Q2, the economy is expected to cross the full-recovery line and then some, perhaps pulling another industry (or two) with it,” the report read. “However, most of the lagging sectors still have a long way to go, and it doesn’t help that some states kept restrictions in place through June.”

The report foresees a positive outlook on Q3, however, with “no activity-limiting restrictions remaining.”

“And, there are American Rescue Plan Act funds now flowing to state and local governments to facilitate their recoveries, along with separate ARPA funding for education (school districts, higher education) and transportation (transit systems, airports),” the report added.

NEW YORK, NEW YORK - MAY 29: Large crowds of people gather around to watch a street performance in Times Square on Memorial Day weekend on May 29, 2021 in New York City. On May 19, 2021 all pandemic restrictions, including mask mandates, social distancing guidelines, venue capacities and restaurant curfews were lifted by New York Governor Andrew Cuomo. (Photo by Alexi Rosenfeld/Getty Images)
NEW YORK, NEW YORK - MAY 29: Large crowds of people gather around to watch a street performance in Times Square on Memorial Day weekend on May 29, 2021 in New York City. On May 19, 2021 all pandemic restrictions, including mask mandates, social distancing guidelines, venue capacities and restaurant curfews were lifted by New York Governor Andrew Cuomo. (Photo by Alexi Rosenfeld/Getty Images)

Personal income report for May

This month’s personal income report showed that annualized personal income was projected to be $20.8 trillion in May, down from $21.2 trillion in April and $24.4 trillion in March when the $1,400 stimulus checks were distributed.

“It is an exaggeration to say Americans are rich and that they can draw on their incomes to spend for months to come and support a continued robust expansion of the economy,” according to Chris Rupkey, chief economist at FWDBONDS. “Americans have lost $3.6 trillion in income since March. It’s a big number and a big deal.”

Real consumer spending fell by 0.4% in May as the lingering effects of the stimulus began to wither away. Though consumer spending stands at 10% for the second quarter, real consumer spending on durable goods decreased by $111.3 billion, while services spending increased by just $33.6 billion.

Due to the rate at which consumers are losing income, Rupkey believes that spending will slow dramatically as the year goes on. He expects growth to falter from the 6.4% growth of this past quarter to as low as 2%, with the slowdown being “more dramatic” than markets are expecting.

“This isn’t a typical economic recovery, it is the fastest rebound in economic history and it no longer deserves emergency stimulus from Washington,” Rupkey said. “Policymakers in Washington are misreading the economic tea leaves and their policies are not normalizing as quickly as the economy is.”

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter: @thomashumTV

More from Thomas:

Used car prices spike as demand 'grossly eclipses available supply:' BlackRock

Beware of impending 'market tug-of-war,' warns investment management CIO

Clover Health rides Reddit-fueled 'meme stock' wave amid record-high trading volume

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit