US GDP Q1 Nowcasts Ease But Still Point To Strong Growth

The US economy remains on track to report an unusually strong increase in output for next month’s first-quarter report on the gross domestic product (GDP), based on a set of nowcasts. The projected gain has softened recently, but the current estimate still reflects a hefty gain.

US growth in the first three months of 2021 is projected to rise 5.9% (real annual rate), based on the median nowcast for several estimates compiled by CapitalSpectator.com. That’s a substantial downgrade from the previous median nowcast in early March, but a near-6% quarter rise still represents a red-hot increase relative to historical record (excepting for 2020’s Q3 bounce-back surge from the coronavirus crisis, which was a one-time outlier event).

In line with bullish expectations for economic growth via nowcasts, the Federal Reserve yesterday upgraded its annual projections for all of 2021. Real GDP for this year is expected to rise 6.5%, a significantly higher forecast compared with the central bank’s previous outlook for a 4.2% increase that was published in December.

If the Fed’s new 2021 estimate is accurate, US GDP this year will increase at the fastest calendar-year pace in nearly 40 years. Despite this bullish forecast, the Fed yesterday reaffirmed that it still plans to avoid raising interest rates for the foreseeable future. The lower-for-longer rates policy is particularly striking since the Fed also raised its inflation estimate for 2021 to 2.4% from 1.8% previously.

The key message: the Fed will prioritize reducing unemployment over keeping a lid on inflation, a major policy shift. Although the central bank expects inflation to rise above its 2% target this year, the increase doesn’t warrant higher rates, Fed Chairman Jerome Powell said in yesterday’s press conference. “I would note that a transitory rise in inflation above 2% as seems likely to occur this year would not meet this standard [for changing current monetary policy],” he advised.

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Disclosures: None.

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