March 2, 2021

10% GDP GROWTH? The U.S. economy is on fire, and is about to get stoked even more.

The U.S. economy has roared back to life in 2021, with first-quarter growth set to defy even the rosiest expectations as another fresh influx of cash looms.

Manufacturing data Monday showed the sector at its highest growth level since August 2018. That report from the Institute for Supply Management in turn helped confirm the notion among economists that output to start the year is far better than the low single-digit growth many had been predicting in late 2020.

The Atlanta Federal Reserve, which tracks data in real time to estimate changes in gross domestic product, now is indicating a 10% gain for the first three months of the year. The GDPNow tool generally is volatile early in the quarter then becomes more accurate as the data rolls in through the period.

That comes on the heels of a report Friday showing that personal income surged 10% in January, thanks largely to $600 stimulus checks from the government. Household wealth increased nearly $2 trillion for the month while spending rose just 2.4%, or $340.9 billion.

Those numbers, along with a burst of nearly $4 trillion in savings, pointed to an economy not only growing powerfully but also one that is poised to continue that path through the year.

“The V-shaped recovery in real GDP will remain V-shaped during the first half of this year and probably through the end of the year,” Ed Yardeni of Yardeni Research wrote in his daily note Tuesday. “However, it will no longer be a ‘recovery’ beyond Q1 because real GDP will have fully recovered during the current quarter. Thereafter, GDP will be in an ‘expansion’ in record-high territory.”

Economists previously hadn’t expected the $21.5 trillion U.S. economy to regain its pandemic-related losses until at least the second or third quarter of this year, if not later.

On Sunday, in an article titled “Was COVID-19 Our Neutron Bomb?,” Victor Davis Hanson explored this potential boom and asked, “What are the political consequences of the likely slow waning of COVID-19 and a projected return to near normality?”

All sorts of known unknowns follow. When will Biden’s tax hikes, new regulations, subsidized green add-ons, gas and oil curtailment, and massive accumulating debt begin to slow things down?

Will a near $30 trillion debt growing at $2 trillion a year, with a progressive laundry list of ever more “essential” entitlements, finally lead to inflation, or stagflation, or permanent zero interest rates—or an abrupt recession, or worse?

No one knows.

But in the political sense, Republicans might wish to prepare for an artificially inflated but robust economy that could last until late in the midterm year 2022. It will do no good to argue that Operation Warp Speed, an end to the failed New York-California blue-state lockdown model, and the remnants of the Trump economic package mostly account for the upswing. The president in power when economies tank or roar gets commensurate blame or credit.

All the talk of a dismal Trump response to the virus will soon and reluctantly wane, as our vaccination rate, our prior national leadership in creating vaccines, and our earlier end to the pandemic will be positively compared with other nations, especially those in Europe. As a result, Biden will transmogrify from a shrill critic of what he inherited to a plagiarist of that recovery.

If Biden and his team get what they wish—a neo-socialist, big government transformation—we will enter tough times. But not yet and perhaps not until after 2022.

Also possibly on the horizon: Inflation Comes for the Profligate.

Now, as the economic recovery from the Covid bust strengthens, soaring government debt is still being heavily monetized in the Federal Reserve’s balance sheet, which has now expanded to a previously unimagined $7.6 trillion, in a classic Treasury-Fed cooperation. The printing (literal and metaphorical) continues and the new administration wants to expand it even more. Isn’t accelerating inflation on the way?

The distinguished former Secretary of the Treasury, economist Larry Summers, recently suggested that it may be. “There is a chance,” he wrote, that government actions “on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation.” I believe this is correct.

If we agree that there is such “a chance,” how big a chance is it? With political delicacy, Summers’ essay does not address this question. Instead, he carefully points out the “enormous uncertainties” involved. While the fog of uncertainty always obscures the economic future, it looks to me like the answer is that the chance is substantial. It would not be at all surprising to see inflation move significantly higher.

“There is the risk,” Summers writes, “of inflation expectations rising sharply.” Well, inflation expectations are already rising among bond investors and analysts, giving rise to such commentaries as these:

Read the whole thing.

Earlier: The Real Estate Market Has Gone Crazy. Exit quote: “You are spot on.  In my opinion the whole process started with our Government printing trillions of dollars with no basis throwing it out on public, bottom line interest rates qualifying lower purchase point clients to jump into 100k more homes, people making short term gains in ‘no reason stock market gains’, builders increasing the prices crazy with the excuse of increased material cost are the big balloon that is going to burst soon. People prove again they have short memory forgetting 2000 & 2008.”

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