We digested a lot of data last week, and the net result is that the U.S. economy still appears to be in a “sweet spot.” For one, growth is broad and trending higher as we gradually emerge from the COVID-19 pandemic.

In the meantime, there are multiple signs pointing to a sharp recovery in the labor market. We are more than 60 percent of the way through earnings season in the S&P 500, and many companies are surprising with profits above expectations, on average 23.3 percent above what was expected.

In the same breath, the concept of how and when we will pay for recent and potential new stimulus plans, including the possibility of higher taxes, is not yet an overwhelming concern for financial markets.

Inflationary pressures have also continued to rise, but the Federal Reserve reiterated on Wednesday its belief that rising prices are likely temporary, saying these are viewed as “largely reflecting transitory factors.”

The preliminary data from April have shown further progress in the U.S. economic recovery. So long as the robust growth at hand keeps the potential headwinds of inflation and taxes at bay, we view the current environment as relatively favorable for investors.

WALL STREET WRAP

FOMC Maintains Status Quo: The Federal Reserve voted unanimously on Wednesday to keep short-term interest rates at a range of 0 to 0.25 percent. The Fed noted that the U.S. economy is strengthening and maintained that rising inflationary pressures should prove temporary. Chair Jerome Powell repeated last week that the FOMC is committed to seeing a full recovery in the labor market before changing its accommodative interest rate policy.

GDP Shows Broad Strength in First Quarter: The Bureau of Economic Analysis reported on Thursday that the U.S. economy grew by a seasonally adjusted, annualized rate of 6.4 percent in the first quarter. The increase was driven by 10.7 percent personal consumption growth in the period, which marked the second-highest figure reported since the 1960s. While inventories and net exports fell in the first quarter, the domestic economy is running at a $19.1 trillion annualized rate, which is just shy of the pre-pandemic high of $19.3 trillion.

Europe Lagging but Seeing Possible Green Shoots: On Friday, we learned first-quarter eurozone GDP declined 0.6 percent quarter-on-quarter, as several key economies had re-enacted business and travel restrictions to combat a new wave of COVID-19. That said, growth could improve throughout Europe in the coming months, as vaccine distribution has improved in Germany, Italy and other places this spring.

In the interim, a report on Tuesday showed that the European Commission’s economic sentiment indicator increased to 110.3 in April. This marked the highest reading since 2018 and could be another harbinger of a positive turn in economic momentum.

Consumer Confidence on the Rise: The Conference Board announced on Tuesday that the Consumer Confidence index increased to 121.7 in April. This was the highest reading since the COVID-19 pandemic began and also marked the largest two-month gain on record.

Below the headline figure, the Labor Differential measure in the survey suggested that the employment market continues to improve. A net 24.7 percent of those surveyed said that jobs were “plentiful” as opposed to “hard to get,” while the same reading was negative as recently as February. This number points toward a solid April jobs report on Friday.

Biden Proposes $1.8 Trillion of Support for Families: In a primetime address to Congress on Wednesday, President Biden detailed a new $1.8 trillion American Families plan. The deal would include $1 trillion of spending, including investments in the education system. The other $800 billion would come in the form of tax credits.

The details of who will pay for this potential program (and when) will likely face an intense debate, as will Biden’s $2.2 trillion infrastructure bill. Both plans purport to boost spending in key areas but will likely be offset by higher taxes in others.

Personal Income Grows at Record Pace: On Friday, the Bureau of Economic Analysis reported that personal income increased by a record 21.1 percent in March, aided by latest round of direct stimulus payments. There have been $2.2 trillion of excess savings accumulated since the pandemic began, and this could continue to grow in the future as the economy continues to regain jobs.

PCE Price Index Climbs as Expected: The Bureau of Economic Analysis said on Friday that the core personal consumption expenditure (PCE) index increased 1.8 percent year-over-year in March, excluding food and energy. Although the Fed has said it is willing to let prices run hotter for longer to support a full jobs recovery, it is still important to monitor inflationary pressures heading into the second half of the year.

THE WEEK AHEAD

ISM on Deck: The Institute for Supply Management (ISM) will post its April manufacturing index today, followed by a reading of the non-manufacturing sector on Wednesday. Robust data here would confirm the record preliminary PMI figures recently reported by IHS Markit.

Consensus Calls for More Jobs Growth in April: On Friday, the Bureau of Labor Statistics will announce the April employment report. The consensus estimates call for the addition of 978,000 non-farm payrolls and for the headline unemployment rate to fall to 5.7 percent. On top of the 916,000 jobs added in March, the recent trend in weekly jobless claims and several employment surveys support the outlook for a solid report.

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