U.S. Posts Strong Economic Data As Rates Remain Low
The pace of economic growth in the first quarter of 2021 clocked in at a 6.40% annual rate which was a huge pick up after Covid-19 essentially shut down the global economy this time last year. Consumer spending led the charge as stimulus checks encouraged spending. Business spending remains robust as does durable goods spending. Spending would have been even better were it not for the constraints that a shortage of semi-conductor chips critical to many fundamental products and industries, such as computers and cars. Ford recently stated that the chip shortage has been disruptive to their ability to managing their inventory and deliver new products to the marketplace.
Big corporate earnings are shaping up to be excellent overall. With the U.S equity market trading at all-time highs, the response to fabulous earnings was muted. Inflation concerns continue to circulate, but for the moment, bond traders are in sync with the Fed and the Fed’s belief that inflation is transitory and will settle down. However, there is some concern that the Fed’s measures on inflation are not taking into account how expensive it is for everyday Americans to buy goods and services. Lumber, copper, gas, and food prices have all surged, as have home prices and equity prices. Wage inflation is also rising as many companies cannot find workers willing to work unless they are paid higher wages. Should the bond market get spooked by the threat of inflation running hotter than expected or not being transitory, higher interest rates could hurt both equity and housing markets as prices are already very high and could pull back with higher financing costs.
The Biden tax proposal is ambitious. How it affects investment is an open question, but if the tax proposal removes 1031 exchanges, this change will put real pressure on expensive real estate markets such as California and New York. I often think about what could disrupt our local market and I think the removal of this tax break along with higher taxes on the wealthy will hurt California real estate overall as higher taxes will discourage risk-taking. However, for now, rates remain low and banks are eager to lend as we encourage all of our borrowers past and present to take advantage of extremely accommodative lending conditions.