This Week's Key US Economic Data Are in the Details

Most of this week's macroeconomic evidence should continue the positive backdrop to the stock market.  The advance report on Q121 Real GDP Growth is expected to be strong, the FOMC should maintain its easy policy stance, and corporate earnings are likely to continue beating expectations.   But, the markets are beginning to focus on the durability of the very strong growth and the potential for higher inflation.  To this point, the details of this week's data may be more important than the headlines.    

High Q121 Real GDP Growth, like the 6.5% (q/q, saar) consensus or 8.3% Atlanta Fed model estimate, will capture the headlines and probably elicit a knee-jerk bounce in stocks.  The important question for the markets, nonetheless, is what evidence the report provides regarding Q221 economic growth.  The internals of the report should confirm solid momentum in Final Sales, with consumption fueled by stimulus payments and the improving jobs market.  The Personal Income Report, released the following day, will show how far March  consumption stands above the Q121 average -- the take-off point for Q221.  But the markets may discount this evidence, believing the boost from the fiscal stimulus is temporary.  So, what may be more important is what the GDP report's internals show regarding the extent to which Nonfarm Inventory Investment has made up the $300 Bn (annualized) net drawdowns over 2020.  Unless it fully makes up for the decline, re-stocking will remain a catalyst for above-trend growth ahead. 

Last week's report showing a decline in Initial Unemployment Claims to 547k argues that economic growth remained strong going into Q221.  The 577k average of the first two weeks of April is well below the near-790k average of both Q420 and Q121.  Further declines would argue that economic growth has not peaked or at least remains above trend.

Although the Fed has downplayed any high inflation print for now, blaming them on temporary bottlenecks and base effects (see my April 11 blog), the markets are not as sanguine.  So, this week's data on the Q121 Employment Cost Index and March Core PCE Deflator are important.  The internals could be important here, as well.

Consensus looks for +0.7% (q/q) in the Q121 ECI.  This report is typically not a market mover, although it is now bears attention as the least affected by compositional shifts among the major measures of labor costs.  Consensus is slightly higher than the 0.6% 2020 average but the same as the 2019 average, not much to be of concern.  But, there is upside risk, given news reports of some large companies offering higher wages in response to labor shortages combined with the possibility of start-of-year hikes.  In addition, sales commissions could be boosted by the surge in retail sales.  These incentives reflect higher productivity and, as a result, are not inflationary.   The ECI excluding sales commissions could be more important than the headline regarding the inflation outlook.  This measure rose 2.5% (Q4/Q4) in 2020 and 2.7% in 2019.

In contrast, there is downside risk to the consensus estimate of a +0.3% m/m in the March Core PCE Deflator, based on the its different composition from the Core CPI (which printed +0.3% m/m).