• The week’s data confirmed that the U.S. economy continued to make progress early in 2021.
  • That progress looks likely to get a substantial shot in the arm from the $1.9 trillion American Rescue Plan in the coming weeks. We have upgraded our U.S. forecast to include the impact of the plan.
  • Retail sales and the housing market continued to show strength in January, as consumers’ preference for all things “home” remained well entrenched.



Economy Progresses in January

Financial News- Retail Tells the Tale of the Pandemic Overall it was mixed news week for financial markets, from the deep freeze in the southeast and devastating blackouts in Texas, to generally positive economic data. Generally, the U.S. economy continues to make progress. Industrial production picked up in January, and both the Empire and Philly Fed manufacturing indices confirmed resilience in the manufacturing sector.

That progress looks set to get a substantial shot in the arm. With the impeachment trial over, House Speaker Pelosi expects a vote on President Biden’s American Rescue Plan by the end of next week. Given the high likelihood of passage, we have updated our U.S. forecast to include it (see update). In combination with the $900 billion package in late 2020, the lift to growth is substantial, adding over 1.5 percentage points to real GDP growth over the course of 2021.

January’s retail sales report provided evidence that Keynesian economics works. If governments deposit money in Americans’ accounts, they will spend it. Retail sales rebounded strongly in January, up 5.3% month-on-month, well above market expectations for a 1.1% increase. This is the first month of growth since September, as the rising numbers of Covid-19 infections and waning government income support programs dampened momentum in the final months of last year.

Financial News- Single Family Housing Remains Above TrendGains at retailers were broad based. Sales were strongest at furniture and electronics stores (+13.1% m/m), non-store retailers (+11% m/m), sporting goods & music stores (+8.0% m/m) and food services & drinking places (+6.9% m/m). Nearly a year from the start of the pandemic, the change in sales by segment tells its story. Americans have spent more time at home than they ever imagined and are spending more on things that help them enjoy their confinement (Chart 1). Staying at home clearly doesn’t require getting dressed up, with sales at clothing stores down sharply.

After such a strong January, some weakness in February retail sales would not be surprising. Still, we expect a strong quarter for consumer spending given the healthy starting point and an increasing number of jurisdictions lifting restrictions as Covid-19 case counts fall. In addition to the latest round of assistance from Washington, consumers are sitting on approximately $1.6 trillion in excess savings from 2020, presenting upside risk to the spending outlook.

As consumers focus their spending on the home, the housing market has been another area of strength. Housing starts gave back some of their gains in January, but the trend remains strong, particularly for single-family homes (Chart 2). The permits data suggests the lull should be temporary, with authorizations up sharply on the month. Single-family home construction, in particular, has been re-energized during the pandemic. This is likely due to a combination of low interest rates, homebuilder confidence in the durability of demand for lower-density housing, and potentially greater availability of workers. While we expect some deceleration from the recent vigorous pace of housing starts aver the coming months, our forecasted level of construction is higher than it was a year ago.

Leslie Preston, Senior Economist | 416-983-7053

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