Profits Flat; Strong Recovery in Place

• Real GDP growth in the first quarter was unchanged in the second estimate at 6.4%. It is almost back to its pre-recession level.
• Corporate profits were flat in the second quarter.
• Real gross domestic income was slightly above its pre-pandemic level.
• Economic growth will be very strong over the next couple of years due to stimulus and vaccines.

Real GDP growth in the first quarter of 2021 was 6.4% at an annualized rate, according to the second estimate from the Bureau of Economic Analysis. This was unchanged from the advance estimate. Upward revisions to consumer spending, business fixed investment, and investment in housing offset downward revisions to exports, investment in inventories and state and local government spending, as well as an upward revision to imports (higher imports reduce GDP).

Real GDP continues to recover from the Viral Recession. As of the first quarter of 2021, it was up 10.3% from the trough in second quarter of 2020. Real GDP in the first quarter of 2021 was just 0.1% below its level in 2019Q4, before the pandemic came to the United States. Real GDP contracted more than 10% between the peak in the fourth quarter of 2019 and the trough in the second quarter of 2020.

Corporate profits were down slightly (less than 0.1%) in the first quarter of 2021 from the fourth quarter of 2020 (unannualized, not adjusted for inflation). After falling more than 20% in the first half of 2020 with the pandemic, corporate profits returned to their pre-pandemic level in the third quarter of last year and have remained there since.

Profits of domestic industries rose less than 1% over the quarter, with a 0.4% increase for nonfinancial corporations offsetting a 1% decline for financial corporations. Profits from abroad fell 2% in the first quarter as the global economy continues to struggle with the COVID crisis.

Real gross domestic income, an alternative measure of the size of the economy based on income from economic activities going to households and businesses, rose 6.8% at an annualized rate in the first quarter of 2021 from the fourth quarter of 2020. Real gross domestic income is actually slightly above its pre-recession level, indicating a full recovery in the economy.

The U.S. economy is set up for a strong economic recovery through the rest of 2021 and into 2022, thanks to vaccinations and federal government stimulus efforts. Consumer spending will grow strongly; U.S. households have about $2 trillion in excess savings, from stimulus payments and expanded unemployment insurance benefits combined with limited opportunities to spend, that they will spend down over the next few years.

Consumer spending growth will shift from goods to services as more people are vaccinated and feel comfortable going out. Business fixed investment will grow strongly as firms look to meet stronger demand. Homebuilding will also be a big positive thanks to ongoing very strong demand for single-family homes and very low mortgage rates. Trade will be a drag in the near term, with strong U.S. demand for goods and weak recoveries abroad but will turn to a positive later this year and in 2022 as the global economy begins to recover. Inventories will also be a near-term positive because of extremely low stockpiles. Supply chain difficulties may be a drag on the recovery in the near term, but those will gradually fade as firms add capacity. Very low borrowing costs, thanks to an aggressive Federal Reserve, are also boosting the recovery.

Real GDP will surpass its pre-recession peak in the second quarter of 2021. PNC is forecasting real GDP growth of almost 7% from the fourth quarter of 2020 to the fourth quarter of 2021, and almost 3% from the fourth quarter of 2021 to the fourth quarter of 2022, well above the economy’s long-term trend. Passage of infrastructure legislation is an upside risk to the outlook. A resurgence in the pandemic and higher-than-expected inflation that would force the Federal Reserve to raise interest rates sooner than expected are the major downside risks.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.