The Booming Economy And Debt And Deficit Fears

Most of the data on the economy is looking very good these days. The number of weekly unemployment claims has fallen sharply. Levels are still high, but just over half the level we were seeing earlier this year. And, this is before all the moves by Republican governors to cut back benefits, so the decline reflects the availability of jobs, not more stringent eligibility.

Consumer spending has been rising rapidly, with the March and April levels both above where they were before the pandemic. Even restaurant sales have largely recovered. Adjusted for inflation, the April levels were just 2.7 percent below where they were in February 2020.

The housing market continues to be very strong, especially in lower-priced areas. The increase in the Federal Housing Finance Administration’s house price index from the first quarter of 2020 to the first quarter of 2021 was 16.0 percent in Wichita, KS, 15.8 percent in Buffalo, NY, 15.6 percent in Dayton, OH, 14.6 percent in Nashville, TN, and 13.8 percent in Gary, IN. By contrast, prices are up just 9.7 percent in the New York metro area and 6.5 percent in San Francisco.

It is too early to know if this is the start of a trend, where people take advantage of increased opportunities for remote work to live in lower-cost, or whether it is a one-time blip. However, if the opportunities for increased remote work stay in place after pandemic is over, it is likely that more people will move to low-cost areas. This will both benefit those areas, by bringing in new consumers and taxpayers, and also the high-cost areas, by relieving pressure on house prices.

Residential construction has also been very strong, running at close to 25 percent above the pre-pandemic pace. Starts did slow some in April, which is likely in past due to a shortage of materials, most importantly lumber. This should be alleviated in the months ahead.

Investment also is strong. New orders for capital goods are running more than 10 percent above the pre-pandemic level. This is noteworthy because it doesn’t appear that the prospect of higher corporate income taxes is doing much to discourage new investment.

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