Warren Buffett’s favorite market indicator hits 205%, signaling stocks are way too expensive and a crash may be coming

Warren Buffett
Warren Buffett.

  • Warren Buffett’s preferred market gauge hit 205%, signaling stocks are heavily overvalued.
  • The “Buffett indicator” compares the stock market’s valuation to the size of the economy.
  • Buffett has said the gauge spiking is a “very strong warning signal” of a future market crash.
  • See more stories on Insider’s business page.

Warren Buffett’s favorite market indicator has climbed to 205%, signaling stocks are vastly overpriced and a crash may be coming.

The “Buffett indicator” takes the combined market capitalization of all publicly traded US stocks, and divides it by the latest quarterly figure for gross domestic product. It serves as a rough gauge of the stock market’s valuation relative to the size of the economy.

The Wilshire 5000 Total Market Index closed just shy of $46.69 trillion on Wednesday, as the S&P 500 and Nasdaq indexes ended the day at record highs. Meanwhile, the latest estimate for second-quarter GDP is $22.72 trillion, putting the Buffett indicator at 205%. That reading is well above the 187% it reached in the second quarter of 2020, when the pandemic was in full swing and GDP was about 15% lower.

Buffett praised his namesake gauge in a Fortune magazine article in 2001, touting it as “probably the best single measure of where valuations stand at any given moment.”

When the indicator surged to a record high during the dot-com bubble, it should have been a “very strong warning signal” of an impending crash, the famed investor and Berkshire Hathaway CEO added. The yardstick also soared in the lead-up to the global financial crisis, making it a useful tool for anticipating downturns. Both times, the indicator remained under 150%.

Read more: The threat of a stock market sell-off is growing, according to Bank of America. Here’s how investors can protect themselves from ‘fragility,’ and a simple options strategy that will buy them more upside.

However, the gauge is far from perfect. For example, it compares the previous quarter’s GDP to the stock market’s value today. GDP also excludes overseas income, whereas US companies’ market caps reflect the value of both their domestic and international operations.

Moreover, the pandemic has disrupted economic activity and depressed GDP since last spring, while also spurring the federal government to support companies, propping up markets in the process. As a result, the Buffett indicator’s readings may be artificially inflated, and could fall as the economy recovers and corporate aid is withdrawn.

Buffett’s indicator isn’t alone in predicting a painful sell-off. Michael Burry, the investor of “The Big Short” fame, warned earlier this year that the stock market is “dancing on a knife’s edge” and the “mother of all crashes” is coming. Jeremy Grantham, the market historian and GMO cofounder, has also sounded the alarm on a “fully-fledged epic bubble” that he expects to burst spectacularly.

Here’s the St Louis Fed’s version of the Buffett indicator (both market cap and GDP are indexed to the fourth quarter of 2007):

Buffett indicator
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Wall Street is bummed the Delta wave has you spending less

Wall Street NY summer
People walk past the New York Stock Exchange (NYSE) on Wall Street on July 15, 2021 in New York City.

  • Goldman Sachs and Bank of America both cut GDP forecasts. The reason: not enough spending.
  • Americans’ spending slid more than expected in July, starving the recovery of its biggest booster.
  • Still, both banks see growth rebounding as the Delta wave weakens and Americans get back to shopping.
  • See more stories on Insider’s business page.

Wall Street is tempering its hopes for the US recovery. A handful of big banks say it’s the American people who spoiled the party.

With the Delta wave on the rise, causing a dip in consumer spending and confidence, Goldman Sachs slashed its forecast for third-quarter gross domestic product growth to 5.5% from 9% on Wednesday. Bank of America followed on Friday, cutting its GDP estimate to 4.5% growth from 7% and officially implying the recovery peaked in the second quarter.

Bank economists aren’t the only ones on Wall Street growing more pessimistic toward the recovery. Only 27% of fund managers expect growth to improve over the next 12 months, according to a survey conducted by BofA earlier in August. That’s the smallest share since April 2020, when lockdowns just started to freeze the US economy. That print also came before retail sales data showed spending slow more than expected in July.

That spending slowdown sits in the center of Wall Street’s gloomier outlook. The surge in Delta cases prompted a resumption of mask-wearing rules across the country and revived fears of catching the coronavirus. Those trends quickly dragged on Americans’ spending. Retail sales slid 1.1% in July, with the largest declines showing up at clothing stores, bookstores, and car dealerships.

Consumer spending counts for roughly 70% of economic activity, making retail sales one of the most relevant measures of the US recovery. Put simply, Americans stopped spending as much in July, and the recovery is likely going to be worse off for it.

The retail sales report shows a “sharp pullback in demand” and starts the quarter off “on a bad note,” BofA economists led by Michelle Meyer said in a note. Even if spending bounces back in August and September, the bleak July print points to “relatively muted” growth in the third quarter, they added.

The data showed a “larger slowdown in spending than we expected,” particularly in service sectors that have yet to stage full recoveries, Goldman economists led by Jan Hatzius said. If case counts continue to rise and restrictions intensify, the recovery could stumble further.

Still, both teams are holding out hope that spending can bounce back before 2022. The slump shouldn’t last long, as the duration of Delta outbreaks in Europe suggest case counts in the US could start to fall in September, the Goldman economists said. The bank raised its fourth-quarter GDP forecast to 6.5% from 5.5% on Wednesday as well, noting the expected drop in cases should power a buying spree similar to that seen through spring.

BofA maintained its fourth-quarter estimate of 6%. The Delta wave will bring “some permanent growth destruction,” but most growth will simply be delayed further into the future, the team said.

“Once the Delta threat is reduced and this COVID wave subsides, we should see the return of pent-up spending for leisure services,” the economists added. “Some categories will have a bigger bounce than others – perhaps travel more than restaurants/bars, for example – but we should see people reengage in these activities.”

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There will be one economy for the vaccinated and another for everyone else

dining out restaurant
The Delta surge is sparking fears that America is losing the taste of normalcy it’s had over the summer.

  • The Delta surge has sparked fears of repeating 2020, but it’s unlikely we’ll experience last year’s economy.
  • Not enough people are vaxxed to stop Delta, but enough are to help keep the economy running.
  • The economy has also learned how to adapt to the pandemic, but you’ll need a shot to participate.
  • See more stories on Insider’s business page.

The Delta variant has thrown a giant curveball at America’s hot vax summer.

Hospitals in less-vaccinated regions are becoming overcrowded. Mask recommendations are back. Many companies have pushed back their return-to-office start dates. And it’s all happening ahead of the upcoming school year.

It’s all revived Covid anxiety in full force for many Americans, who are fearing another lockdown and quarantine, and rapidly losing confidence in the economy’s ability to handle it. But while Delta is a very real threat right now, it’s unlikely we’ll experience the same economy that we did a year ago.

Scary media headlines lacking crucial context are behind much of the understandable angst, but the emerging science shows the vaccines largely protect against hospitalization. Not enough Americans are vaccinated to prevent Delta’s spread, but enough people are vaccinated to keep the economy open and maintain a sense of normalcy.

That’s because the economy has also mutated alongside the virus, learning how to adapt to a pandemic world. Once Americans understood how the virus spreads, many professions improvised methods to limit physical contact and keep the economy running while preventing another lockdown.

Given the recent surge in the Delta variant, cities are imposing their own rules, and if you’re not vaccinated, you’ll have limited participation. For example, New York City and San Francisco will require proof of a vaccine for indoor activities like dining and using the gym. More and more employers are requiring it of their workers as well and, as Insider’s Juliana Kaplan reported, it’s even increasingly required in job postings.

The health risks for the vaccinated aren’t near what they were in 2020, meaning they can still live their lives with a degree of normalcy. What’s emerged is a two-track economy marked by a patchwork of highly vaccinated areas and poorly vaccinated regions. This lack of cohesiveness isn’t ideal, but improved from the unvaccinated economy that shut down last year.

We may still be living in a pandemic, but it’s looking like the economy won’t repeat 2020.

Vaccines allow us to live our lives during the pandemic

In 2020, Covid was a pandemic for everyone. Now, it’s become “a pandemic of the unvaccinated,” CDC Director Dr. Rochelle Walensky said during a press briefing last month.

The unvaccinated are most at risk of disease from Covid and are largely driving the Delta surge. While the highly contagious variant has increased the odds of “breakthrough” infections among the vaccinated, these cases affect only 0.01% to 0.29% of fully vaccinated people in all states reporting data to the CDC through July.

A full vaccination with an mRNA vaccine is about 88% effective at preventing symptomatic disease caused by Delta, according to an August study published by the New England Journal of Medicine. That means the vaccinated also remain well protected from serious disease leading to hospitalization and death, likely to have mild or no symptoms.

covid vaccine
Even with the Delta surge, vaccines make a big difference in how our economy can operate.

But whereas the vaccinated were unlikely to transmit the Alpha variant to others, Delta is a different story: It’s transmissible among the vaccinated, making it more contagious, per the CDC. However, a recent study found that even though Delta viral loads are about the same for both the unvaccinated and vaccinated, they fall more quickly for the latter. And because the chances of a breakthrough infection are relatively rare, vaccinated people are overall less likely to transmit the virus to others.

However, the problem is that only half of Americans are fully vaccinated (vaccines haven’t yet been approved for kids), and they thus need to bear the burden of protecting the unvaccinated half.

While a portion of the vaccinated very worried about Delta may personally quarantine again, it’s likely most of America will keep keeping on: the vaccinated who are trying to maintain the summer’s taste of normalcy, albeit with more caution, and those among the unvaccinated who are opposed to restrictions and always acted like everything was normal in the first place will continue to stimulate the economy.

Even with the Delta surge, we won’t go into full lockdown again

The hybrid economy of the vaxxed and unvaxxed also means it’s unlikely America will go under lockdown again. President Joe Biden said back in June that he didn’t foresee a lockdown under Delta since so many Americans are vaccinated.

“The existing vaccines are very effective so no, it’s not a lockdown, but some areas will be very hurt,” he said.

Dr. Anthony Fauci echoed a similar sentiment earlier this month, saying that enough people are vaccinated that a lockdown isn’t necessary, although the US would still see a rise in cases because just as many people aren’t vaccinated. “I think we have enough of the percentage of people in the country – not enough to crush the outbreak – but I believe enough to not allow us to get into the situation we were in last winter,” he said.

It helps, too, that the economy is also better prepared for the latest wave of infections than it was a year ago. It’s become so adaptable that experts widely expect the economic fallout from the Delta variant to be a fraction of early 2020’s historic recession, Insider’s Ben Winck reported.

The way the economy is “mutating” has left it less vulnerable and more productive, David Kelly, JPMorgan Funds’ chief global strategist, said in a note on Monday. He cited four key shifts that have boosted productivity and would protect the US from another pandemic related recession: the QR menu at restaurants, the continued rise of e-commerce, the video-conferencing boom, and the shift from to cash to cards.

restaurant dining out
The economy and its people have adapted to pandemic life.

The economic forecast from the beginning of the third quarter also looks promising. Bloomberg Economics predicts GDP will expand by 1.8% in the third quarter from the past three months. It also anticipates inflation peaking before falling to a more moderate pace during the same time frame.

Then there’s the fact that the US added nearly 1 million jobs in July. And US jobless claims slid to 375,000 last week, suggesting little Delta impact. Spending is also going strong – Target and Walmart are headed toward a strong back-to-school season, and malls have made a comeback.

Now, if the pandemic has taught us anything, it’s that life is uncertain. Things could change for better or for worse overnight. There are still signs of a threatened economy: BofA predicts a pullback in spending, and already noted a decline in spending on airfare over the past week. Some events, like the New York International Auto Show, have been cancelled. And other countries that have already been experiencing a Delta surge, like Israel, have implemented additional rounds of restrictions.

But Richard Curtin, chief economist for the University of Michigan’s Surveys of Consumers, said Friday that Delta may not harm the economy as much as people think. Should economic recovery continue and vaccination rates improve, he said, it’s possible Americans could “shift toward outright optimism.”

We’ve learned how to be flexible, and so has the US economy. It’s enough to keep us from repeating 2020 all over again as we wait for more people to get vaccinated.

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Global shares pull back as concern over US growth, Asia tech rout weigh on investor confidence

Traders work on the floor of the New York Stock Exchange
Traders work on the floor of the New York Stock Exchange

  • Global shares fell on Friday after US GDP and unemployment data came in weaker than expected.
  • Investor concern about Chinese regulatory crackdowns, especially in the tech sector, continued.
  • Higher-than-expected inflation readings undermined European markets, despite strong EU growth.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Global shares fell on Friday after US GDP and unemployment data the previous day reflected slower economic growth than expected, while a looming threat of a Chinese regulatory crackdown on tech stocks continued to weigh on investor confidence.

US futures fell, with Dow Jones futures 0.34% down, S&P 500 futures down 0.7% and Nasdaq futures down by 1.16% at 5:43 am E.T.. The benchmark indices neared record highs on Thursday, leaving the S&P 500 less than 0.1% off an all-time peak.

Weaker-than-expected US economic growth in the second quarter and a slower fall in unemployment that many economist had forecast soured investor optimism over the outlook for recovery, analysts said.

Meanwhile, Amazon’s quarterly earnings fell short of expectations, as the e-commerce giant missed quarterly sales estimates for the first time since 2018, while sales and profit forecasts were below expectations, further worrying investors about the economic outlook. The company shares fell as much as 7% in pre-market trading.

Yields on 10-year Treasury notes were last at 1.251%, down by 1.8 basis points ahead of inflation and personal spending data.

Rising Covid-19 cases and Chinese regulatory pressure on tech stocks also weighed on markets. Earlier in the week, Chinese officials had said they would be more considerate of volatility when making regulatory decisions, but the calming words had little lasting impact.

“The fact the tech-heavy Nasdaq futures have led US index futures lower suggests that they, and China, Japan, and South Korean markets are suffering a dose of pre-weekend China regulatory risk jitters,” Jeffrey Halley, senior market analyst at OANDA, said.

Asian markets closed lower on Friday, with Tokyo’s Nikkei 225 falling 1.8%, the Shanghai Composite declining by 0.42% and Hong Kong’s Hang Seng index dropping by 1.28% as a surge in delta variant cases and regulatory concerns dominated sentiment throughout the region.

In Europe, London’s FTSE 100 was last down 0.93%, the EuroStoxx 50 had declined by 0.69% and Frankfurt’s DAX was last down 0.99%. A measure of eurozone inflation rose more than anticipated in July, coming in at 2.2% compared to an expected 2%. This was its highest since October 2018.

The impact of this could not be set off by a strong read of eurozone GDP, which rose 2% quarter-on-quarter in the the three months to June, breaking two straight quarters of contraction, despite initial difficulties with the vaccination rollout, rising delta variant cases and continuing supply-chain issues.

“Looking ahead at 3Q, we would note that the delta variant is causing some delays in the easing of restrictions and that supply chain problems continue to weigh on manufacturing production. Still, we expect growth to come in very strong – currently pencilled in at 2% quarter-on-quarter – as domestic and foreign demand remain very robust.” ING analysts said.

Oil prices fell on Friday, reversing some of the previous day’s losses. Slower economic growth and recovery could indicate lower demand for a longer than expected time. Brent crude was last down 0.31% at $74.87 per barrel, while WTI crude was last at $73.36, down 0.35%.

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America’s economic recovery is already stalling, but Biden is trying to buy a second wind

Joe Biden
President Joe Biden delivers a speech on voting rights at the National Constitution Center in Philadelphia on July 13, 2021.

  • The US economic recovery is faltering. Pres. Biden’s spending plans promise an acceleration.
  • US economic growth missed Q2 forecasts, and new COVID risks could slow the expansion further.
  • While conservatives fear new spending can boost inflation, the White House sees it as a historic opportunity.
  • See more stories on Insider’s business page.

The US economic recovery might have just peaked. The Biden administration has plans to keep the party alive, but it won’t be cheap.

Data published Thursday showed economic output growing at an annualized rate of 6.5% in the second quarter. It marks a complete recovery from the pandemic-era drop in output, with gross domestic product finally surpassing its end-of-2019 peak.

Yet economists expected growth of 8.5%, making the government report a considerable disappointment. The quarter also benefited from stimulus and the reversal of lockdown measures. It’s highly probable that growth will moderate in the following quarters.

And new obstacles are emerging. The Delta variant of COVID-19 is causing some cities to reinstate mask mandates, possibly discouraging people from dining out, heading back to their offices and hurting consumer spending. Americans are also staring down a so-called fiscal cliff, with support programs like the student-loan moratorium and enhanced unemployment benefits slated to expire in the fall.

Growth is still expected to trend well above its historical average through the rest of the year. But with nearly 10 million Americans still unemployed, the economy remains far from fully healed.

Enter President Joe Biden and his multi-trillion-dollar spending plans. As economic growth is set to slow, the White House is moving full-steam ahead on packages it argues will lead to a stronger expansion and years of permanently higher output. It’s pushing $4 trillion in new infrastructure spending that encompasses physical items like roads and bridges, and upgrading broadband connections.

That’s not all. Biden and Democratic lawmakers are also trying to advance plans for new spending on family care, free education, and clean energy. Senate Democrats struck a deal on a $3.5 trillion budget blueprint, and it will embark on a party-line process known as reconciliation. That may face cuts in the weeks ahead, however.

The two proposals make up what Treasury Secretary Janet Yellen deemed “historic investments” that promise “a big return.” Instead of providing the kind of immediate boost yielded by the March stimulus package, the White House has billed the follow-up plans as drivers of permanently higher growth through the 2020s. Simply put, the Biden administration is looking to buy its way to a stronger rebound.

Yet conservatives argue it could cause a significant rise in inflation and set back the recovery.

“In the short-term, the economy is heading into its potential growth rate,” Brian Riedl, an economist at the right-leaning Manhattan Institute, told Insider. ” Any additional stimulus will likely lead to inflation rather than long-term growth.”

The White House isn’t dissuaded by these arguments.

“We still have work to do to build our economy back better,” White House Press Secretary Jen Psaki said in a statement. “It’s why he’s working with Democrats to deliver on additional support for our middle class that will create a fairer, more sustainable, and stronger economy.”

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Global growth will hit a 5-decade high in 2021 on vaccine-powered rebound, OECD says in upgraded forecast

Japan shopping street coronavirus
  • The OECD lifted its 2021 global GDP estimate to 5.8% from 4.2%, forecasting the fastest growth since 1973.
  • Group of 20 countries will see even stronger growth and emerging countries will lag, the organization said.
  • Central banks need to look through temporary inflation and keep policy support in place, the OECD added.
  • See more stories on Insider’s business page.

Economic recoveries are improving around the world, but the global rebound remains massively uneven, the Organization for Economic Co-operation and Development said in a new report.

The OECD revised its estimate for global gross domestic product higher on Monday, citing unprecedented policy support and the effectiveness of COVID-19 vaccines. Output is now expected to grow 5.8% in 2021, up from the December 2020 forecast of a 4.2% expansion. That rate would mark the strongest year of economic growth since 1973 and follow last year’s 3.5% contraction, the OECD said.

Global GDP will then grow 4.4% in 2022, according to the report. Global income will still sit roughly $3 trillion below its pre-crisis trend by the end of next year as emerging countries struggle to keep up.

“The global economy remains below its pre-pandemic growth path and in too many OECD countries living standards by the end of 2022 will not be back to the level expected before the pandemic,” Laurence Boone, chief economist at OECD, said.

Living conditions aren’t the only disparity expected to widen through the recovery. Real GDP is expected to grow 6.3% and 4.7% among G20 nations in 2021 and 2022, respectively. That outpaces the average growth estimate.

Meanwhile, some emerging-market economies are expected to post substandard growth in the near term. Countries still enduring deadly waves of COVID-19 such as India and Brazil “may continue to have large shortfalls in GDP relative to pre-pandemic expectations” and only bounce back once the virus threat fades, the organization said.

Improving vaccine distribution is key to supporting such countries, especially as virus uncertainties linger. New variants of COVID-19 could necessitate a return to partial lockdowns if populations aren’t vaccinated quickly enough, the organization warned. Such a resurgence could also drag consumer confidence lower and halt any rebound in spending.

Upside risks have emerged as well. Household saving boomed through the pandemic, and that cash could soon be unleashed as people unwind pent-up demand. Spending just a fraction of the bolstered savings “would raise GDP growth significantly,” the OECD said.

But with spending comes inflation. Supply-chain disruptions and bottlenecks around the world have driven material prices higher in recent months. When coupled with a sharp bounce in demand and various stages of reopening, price growth now sits at its highest levels in more than a decade. The OECD expects inflation to average 2.7% in 2021 before cooling to 2.4% next year.

Central banks should allow for a brief inflation overshoot as production normalizes and temporary pressures ease, Boone wrote. Running economies hot can allow for stronger hiring and wage growth, particularly among low-income groups. Central banks must “remain vigilant” and look through temporary inflation, the economist said.

“What is of most concern, in our view, is the risk that financial markets fail to look through temporary price increases and relative price adjustments, pushing market interest rates and volatility higher,” Boone added.

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Bank of England boosts 2021 UK growth forecast to 7.25% in wake of successful vaccine rollout

2021 04 29T130216Z_1_LYNXMPEH3S0U4_RTROPTP_4_BRITAIN BOE.JPG
The Bank of England kept interest rates on hold.

The Bank of England sharply upgraded its forecasts for the UK economy on Thursday, citing the successful rollout of coronavirus vaccines and a sharp drop in COVID cases.

Policymakers at the Bank kept interest rates at the record-low level of 0.1% and maintained the size of its bond-buying package, through which the BoE injects money into the economy, at £895 billion ($1.25 trillion).

The BoE predicted UK gross domestic product will grow 7.25% in 2021, considerably higher than its February estimate of 5% growth. UK GDP contracted 9.8% in 2020, the worst slump out of the G7 countries.

The Bank said the unemployment rate should now peak at just under 5.5% in the third quarter of 2021, down sharply from an earlier estimate of a 7.75% peak. And it said UK GDP should recover its pre-pandemic level towards the end of 2021, earlier than previously expected.

“New COVID cases in the United Kingdom have continued to fall, the vaccination programme is proceeding apace, and restrictions on economic activity are easing,” the bank said in its monetary policy statement.

The central bank’s monetary policy committee (MPC) said that while the overall size of its quantitative easing (QE) program would remain the same, the weekly pace of its purchases would slow somewhat.

Thomas Pugh, UK economist at consultancy Capital Economics, said this move was not due to the strength of the economy. “The MPC has always said that it aimed to finish the £150 billion of QE announced last November ‘around the end of 2021’, so the pace of asset purchases was always going to slow at some point,” he said.

The UK has achieved one of the fastest vaccine rollouts in the world, with 51% of the population having received at least one dose by May 4, according to Our World In Data. That compared to 63% in Israel and 44% in the US.

Business and consumer confidence has picked up, as coronavirus cases have fallen following strict lockdowns in January and February and the government has gradually reopened the economy.

On the topic of inflation, which has unnerved financial markets in recent months, the Bank said it expected a short-term spike followed by a fall. It said year-on-year inflation is expected to rise above the Bank’s 2% target towards the end of 2021 before returning to around 2% in the medium term.

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US GDP will exceed its pre-pandemic peak by the end of June, Atlanta Fed model says

restaurants
  • The Atlanta Fed’s GDPNow estimate sees economic growth reaching 10.4% in the second quarter.
  • Such an expansion would place US GDP above its pre-pandemic record and mark a full recovery.
  • First-quarter growth reached 6.4% as stimulus and vaccination allowed the economy to reopen.
  • See more stories on Insider’s business page.

By at least one popular measure, the US economy will fully recover and exceed its pre-pandemic strength in the second quarter.

US gross domestic product is expected to grow at an annualized rate of 10.4% through the quarter that ends in June, according to the Federal Reserve Bank of Atlanta’s GDPNow model. Growth at that pace would place economic output at a new record high, surpassing the peak seen during the fourth quarter of 2019. It would also be the second-strongest rate of growth since 1978, exceeded only by the record-breaking expansion seen through the third quarter of 2020.

The central bank’s nowcast is a type of projection that is updated as new economic data is published. GDPNow isn’t an official forecast from the Atlanta Fed, and is instead used to narrow down where quarterly growth is likely to land. The model also ignores the pandemic’s impact beyond its influence on source data such as retail sales and global trade, according to the Fed.

The first GDPNow reading for the second quarter was published on Friday, just one day after the Commerce Department published its initial estimate of first-quarter growth. US GDP expanded at an annualized rate of 6.4% in the first three months of the year, missing the median estimate of 6.7% but still showing a sharp acceleration from the prior period. The jump was primarily fueled by widespread vaccination, gradual reopening, and stimulus passed by former President Donald Trump and President Joe Biden.

To be sure, the last quarter’s expansion came in softer than the Atlanta Fed’s final first-quarter estimate of 7.9%.

Though some individual indicators have already surpassed their pre-pandemic levels and signal a strong recovery, GDP remains just below its previous peak. Following the first-quarter reading, GDP has retraced about 96% of its pandemic-era decline. With data tracking consumer spending and hiring trending higher as the economy reopens further, the US is largely expected to complete its GDP recovery in the next two months.

Economists outside the Fed also see growth accelerating through the current quarter. The consensus estimate from a survey of forecasters calls for annualized growth of just under 9% in the second quarter. The most bullish estimates see GDP expanding at a rate of more than 11%, while the least optimistic expect growth to land at about 6%.

The estimates underscore the fact that, should vaccination continue and case counts decline further, the US is on track for its strongest rate of annual growth in decades. The International Monetary Fund estimates GDP will grow 6.4% through all of 2021, exceeding global growth of about 6% and marking the fastest rate of expansion since the early 1980s. Separately, Federal Reserve officials hold a median estimate of 6.5% growth this year.

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America is getting ready for its post pandemic glow-up

eating restaurant spending reopening
Americans need to spend to help the economy recover.

  • America is reopening, and coming out of its pandemic shell could mean an economic boom. It’s a glow-up.
  • They’re already spending on outdoor activities, transit, restaurants, clothes, and beauty.
  • But America will also look different, and spending in other areas is weak. We don’t know what will emerge.
  • See more stories on Insider’s business page.

America is getting ready for its post-pandemic glow-up.

Peak sweatpant has passed and high heels are hot again, in the ultimate symbol of an economy ready to let loose. Americans are booking beauty services, buying going-out clothes again, and readying for a “hot vax summer” as they emerge from lockdown looking and feeling different than they entered, helping the economy roar back to life in the process.

It’s the result of vaccination rates revving up, big cities reopening, and Americans sitting on a ton of cash. Between three stimulus checks and the decline in discretionary spending that accompanied a pandemic shutdown, Americans were holding $2.6 trillion in excess savings as of mid-April, per Moody’s Analytics.

And that’s why so many economists are predicting that a lockdown lift will see the biggest boomtime in a generation, potentially ushering in a new era in the US economy. Moody’s Analytics expects the US economy to grow 6.4% in 2021 after shrinking 3.5% in 2020.

But to power such an economic transformation, Americans need to keep spending.

BofA’s head of North America Economics, Ethan Harris, wrote in March that the US’ economic fate will depend on whether Americans view their excess savings as wealth or deferred income. His team sees the savings being treated as the latter, which should “help support exceptional growth this year in addition to the tailwinds from fiscal stimulus and an improving virus picture.”

Mark Zandi, chief economist at Moody’s Analytics, agrees. “An unleashing of significant pent-up demand and overflowing excess saving will drive a surge in consumer spending across the globe as countries approach herd immunity and open up,” he wrote in a note. He sees 20% of excess savings being spent in 2021, and another 20% next year.

Credit card spending is already up, but it’s just the beginning. Inflation, unequal savings distribution, and an uneven economic recovery may prove to be challenges in spending enough to fuel an economic boom.

Spending on outdoor activities and a ‘hot vax summer’

“The snooze is over,” wrote BofA’s Michelle Meyer, head of US economics, in a note published on Thursday. BofA’s card spending showed a massive uptick in consumer spending for the week, up 45% year-over-year and by 20% over two years previous.

The third stimulus has already impacted Americans’ bank accounts, per Bureau of Economic Analysis data. As incomes climbed by 21.1% last March – a record monthly income leap dating since 1946 – consumer spending rose with it, increasing by 4.2%. Americans haven’t spent that much since June. Total consumer spending, not adjusted for inflation, has now exceeded pre-pandemic levels.

In consumer spending, still leading the way is solitary leisure solo activities that Americans turned to in the social-distancing era as previous forms of leisure, especially hospitality and entertainment, fell off dramatically. Spending on sporting goods such as golf, campground, and bike equipment, is continuing its momentum with activity above pre-pandemic norms, per BofA.

But we’re also starting to see a resurgence in the activities of pre-pandemic yore. Spending on transit, restaurants and bars, department stores, and clothing have all increased by over 100% on a daily basis over the past 10 days, per BofA.

haircut
Beauty services are seeing a flood of bookings.

Retailers are gearing up for a “peacocking effect” and dress sales on the rise, while jeans are making a comeback, Insider’s Avery Hartmans reported. Blazers, stylish tops, and brightly colored sandals are all seeing signs of life. Retail CEOs everywhere from Gap to Urban Outfitters have noted signs of an incoming retail boon, with the latter already seeing an uptick in purchases of going-out clothes.

The post-pandemic beauty boom has also arrived, as The Atlantic’s Amanda Mull reported. From eyebrow threading and hairstyling to mani-pedis and cosmetic injections, she wrote, people are booking up beauty services for their own personal glow-up. Beauty sales increased by 31% for for the week ending April 24, per BofA, compared to 2019.

The start of this spending is already making a difference. GDP grew at a 6.4% annualized rate in the first quarter, the Commerce Department estimated on a preliminary basis.

Economists have thus upped their predictions for economic growth every month of the year, according to Bloomberg’s latest monthly survey, forecasting an annualized pace of 8.1% GDP growth in the second quarter.

An unequal recovery and unequal savings

While Americans have already begun swiping their cards, there are still holes in the economy to fill and challenges to overcome.

Entertainment and airline spending are improving, but still weak, per BofA. More Americans intend to travel as the weeks go by, with some already booking vacation rentals and hotels, and airlines just saw their busiest weekend since pre-pandemic, but travel’s comeback is a gradual one.

That might partly be because the economic recovery across America hasn’t been uniform. BofA spending analysis finds the South and parts of Midwest are faring better economically than the West and the Northeast. That’s likely because the latter regions had longer lockdowns and a slower easing of restrictions in an attempt to curb the spread of the coronavirus.

Also unequal is the share of savings built up during the pandemic. Zandi said in the Moody’s note that this would limit an even bigger boom in spending. “Much of the excess saving has been by high-income, high-net-worth households who are likely to treat the saving more like wealth than income, and will thus spend much of less it, at least quickly,” he wrote.

thanksgiving travel 2020
Airline spending has improved, but is still weak.

Nearly two-thirds of the excess savings in the US is by households in the top 10% of the income distribution, per Moody’s data, and three-quarters is by those in the richest 20%.

Consumer spending accounts for 70% of the American economy, and half of that is from the top 10% of American households, per estimates from Goldman Sachs and Deutsche Bank, respectively. That means about one-third of US GDP comes from spending by the top 10%. In other words, the US needs spending from wealthy households the most.

But there’s a side effect that may come with unleashing pent-up demand: inflation. While experts don’t think the economy will overheat like it did in the 1970s, some goods and services have begun to get more expensive amid the supply shortages that have come with reopening. The unpredictability of inflation could cause consumers to curb their spending.

A world with baggy jeans and remote work

In a post-pandemic world, though, America will look a little different. The point of a glow-up, after all, is transformation.

And while Americans whiled away their quarantine days baking bread and reorganizing their closets, new trends emerged. Clothes are brighter, wide-legged jeans have replaced skinny jeans, side parts are no longer cool, and the “ugly fashion” movement has seen its pre-pandemic popularity accelerate as shoppers increasingly purchase things like grandpa shoes and Crocs

Urban areas too, will look a little different. While experts and the data are pointing to big cities like New York making a comeback, they will likely function in new ways. Urban theorist Richard Florida previously told Insider he thinks major cities will be reshaped and revived by a newfound focus on interpersonal interaction that facilitates creativity and spontaneity. He said the community or neighborhood itself will take on more of the functions of an office.

The work-from-home revolution could bolster new cities’ real-estate markets, as more broadly shared prosperity counteracts decades of increasing regional inequality, but spending within cities themselves could suffer. For instance, economists estimate spending in downtown areas will be 10% depressed – or more in the case of Manhattan – because of the remote-working revolution. So the fashions on the street will look different, and the cities will probably be a bit emptier.

People are also buying more stuff for inside the home. Spending in home categories was up 50.3% over 2019 for the week ending April 24, according to BofA. Americans have learned to spend in a more private way during a year inside. The glow-up is on, but Americans will have to keep spending for a truly impressive makeover.

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China’s economy grew a record 18.3% in the first quarter – but that number doesn’t tell the whole story

Chinese consumers

China’s economy grew a massive 18.3% in the first 3 months of the year, the strongest ever quarterly year-on-year growth figures for the world’s second-biggest economy.

But that number doesn’t tell the whole story. When looked at quarter over quarter, China’s economic growth slowed to 0.6% in the first quarter from an upwardly revised 3.2% in the final 3 months of 2020, the country’s National Bureau of Statistics said.

Analysts cautioned that the 18.3% figure was flattered by what’s known as base effect, a problem that will be plaguing economic data over the coming months.

As headline gross domestic product and many other key economic figures are typically measured year on year, abnormally low figures a year ago will make the most recent growth seem huge.

That’s exactly what happened here. China’s economy shrank sharply in the first quarter of 2020 as coronavirus started to spread and shut down parts of the country. Compared to then, China’s first-quarter growth in 2021 was enormous.

The headline figure “tells us little about the economy’s current momentum,” Julian Evans-Pritchard, senior China economist at consultancy Capital Economics, said. The record growth was “entirely due to a weaker base for comparison from last year’s historic downturn,” he said.

“In quarter-on-quarter terms, growth dropped back sharply and, with the exception of Q1 last year, was slower than at any other time during the past decade.”

Despite this quarterly slowdown in growth, China’s economy has recovered rapidly from the pandemic. Its gross domestic product regained its pre-coronavirus size by the end of September, and it was the only major economy to expand in 2020.

Analysts have cautioned a range of economic data is about to be skewed by this base effect. Inflation has become a point of concern, given the sensitivity of markets and central banks to the figures.

Eleanor Creagh, Australian market strategist at Saxo Bank, said in a note in March that there is “a raft of data ready to kick off the ‘base-effect cliff’ into the heart of the crisis last year.”

She cautioned that “these incredibly favourable base effects will render a huge year over year acceleration in the data due March, April, May.”

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