On April 29th, the Bureau of Economic Analysis announced that the U.S. economy grew at a 6.4% annualized rate in the first quarter of 2021. This robust level of economic growth was driven by 10.7% growth in stimulus fueled spending by consumers. Despite these strong spending trends, consumers still managed to save 21% of their income, leaving ample dry powder to fuel the economy in the quarters to come. In our view, these results were even more robust than they might appear. A reduction in inventories was a negative drag of -2.6%. Meaning without this drag, the economy would have grown over 9%. The sizable reduction in inventories reflects the supply chain challenges we are seeing from transportation bottlenecks and a lack of inventory in specific goods, such as semiconductors and lumber.
The strength in consumer spending remains tilted toward goods over services. In fact, the level of spending on goods is 12.5% higher than pre-pandemic levels. Services, which account for a greater share of consumer spending continue to show signs of improvement but remain behind their pre-pandemic trend. As we look ahead, we would expect to see a different story later in the year and into 2022 as demand for goods fades while consumers reallocate their spending back to restaurant, travel and leisure activities that they’ve had to forgo.
These positive economic trends are showing through in corporate earnings. We are roughly halfway through first quarter earnings reports, and the results have been quite strong. Take for example Apple, which is levered to trends in increased consumer spending. On Wednesday the 28th, Apple reported earnings that not only were ahead of expectations but were 16% higher than the average estimate. For a company as large as Apple, this outcome was awestriking. The market reaction, however, was more muted. In the day following its earnings release, shares of Apple were actually down -$0.10 on the day. The reason being is that this level of strength is likely to be temporary and spending on goods such as Apple devices will revert back toward historic trends over time. Therefore, it is hard to imagine Apple, or other businesses benefiting from the surge in consumer spending, to sustain this trend.
What we are seeing in the data today is evidence that the economy is not only on the mend but is red hot. This is likely to lead to a shift in how dollars are allocated across the economy along with who will benefit from the next leg of the cycle.
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