Following the 2020 first quarter, the stock market was clearly looking ahead to a post-COVID economic recovery. Pent-up demand, declining unemployment, low interest rates, and the multiple fiscal stimulus programs painted a very positive picture for economic growth based on stock market performance. Where We’re Going The Economy Since early 2020, the economy has been about COVID-19. If the pandemic could become a distant bad memory, economic growth would consistently return. After the first quarter of 2020, the stock market was already predicting a strong economic rebound after the pandemic. The major question was when, not if, that would occur. In early 2021, following the significant increase of vaccinations and multiple fiscal stimulus programs, there was a growing list of positive economic signs. • Economic Growth - Finally, in the first quarter of 2021, after a string of eight consecutive quarters in which GDP growth was lower relative to the prior year quarter, GDP growth increased. First quarter 2021 GDP growth was estimated at 0.4% compared to the first quarter 2020 GDP growth of 0.3%. • Retail and food sales - according to the U.S. Census Bureau , retail and food sales rebounded strongly in March 2021. Initial estimates were that March 2021 retail and food sales increased 9.8 percent from February 2021 and were up 27.7 percent from March 2020. Total sales for the January 2021 through March 2021 period were up approximately 14.3 percent from the same period a year ago. • First time unemployment insurance weekly claims – weekly unemployment claims continued to drop. According to the U.S. Department of Labor , for the period ending April 10 seasonally adjusted initial claims were at an estimated 576,000, a decrease of 193,000 from the prior week. This was the lowest level for initial claims since March 14, 2020 when it was 256,000. The United States economy typically chugs along at a pretty good pace unless there is a bump or shock to derail its progress. In 2020, the economic shock was a pandemic. Economic growth can get derailed by inflation (which leads to higher interest rates), a financial crisis, or even a pandemic. Following the onslaught of COVID-19, the challenge was to get the economy moving forward again. Economic numbers from the first quarter of 2021 indicate that the economy is moving forward once again. That growth should continue until the next bump or shock occurs – be it from a pandemic recurrence or some other factor. Economic growth precipitates a snowballing effect, where economic growth continues until something happens to stop it. When economic growth occurs, increased employment leads to more consumer spending, which leads to more economic growth. After four consecutive quarterly declines during the financial crisis, GDP increased in the fourth quarter of 2009 relative to the prior year quarter. Quarterly increases continued until COVID-19 hit the economy in the second quarter of 2020. The economic growth continued until the pandemic shock ended it. That’s typical for a U.S. economic recovery – growth is generally consistent and continues until the next economic bump or shock. After three consecutive quarterly declines in 2020, GDP growth returned in the first quarter of 2021. That growth should continue until the next economic bump or shock. President Biden’s Infrastructure (American Jobs) Plan On March 31 President Biden unveiled a $2 trillion wide-ranging infrastructure plan which would be implemented over an eight-year timeframe. That plan would have a significant impact on how economic growth occurs in the future. The plan includes spending in three major areas: 1) Transportation Infrastructure and Resilience - $611 billion, 2) Power Grid, Internet, and Water Systems - $337 billion, and 3) Housing, Schools, Workforce Development - $1.178 trillion. Taxes, Deficits, Debt, and Inflation The $2 trillion infrastructure plan would be financed primarily through an increase in corporate taxes. The statutory (legal) corporate tax rate was lowered from 35% to 21% in 2018. The 35% rate had been in place since 1993; the 21% rate is the lowest since prior to World War II. The statutory tax rate is the legal percentage established by law. Lowering the statutory rate certainly lowers the taxes paid by a company. However, the effective corporate tax rate, the rate that a company actually pays on pre-tax profits, can be much lower than the statutory tax rate due to tax
4
Center for Business and Economic Insight
Made with FlippingBook Learn more on our blog