Job creation will look 'quite robust in April': economist

Michelle Meyer, Bank of America Chief U.S. Economist, joins Yahoo Finance Live to assess the state of the U.S. economy and discuss the outlook for the housing market in 2021.

Video transcript

BRIAN SOZZI: All right, let's bring in Michelle Meyer. She is Bank of America's chief US economist. Michelle, always good to see you. Let's just stay on this point. We've seen the initial claims data improve a good bit, retail sales data improving. What do you think these data points say about the next jobs report?

MICHELLE MEYER: So it's setting up, I think, to be a very strong report. We already saw in the March report 916,000 jobs were created. I think we'll likely be that in the next report. So it should be in the order of a million, maybe above. We're still getting data that will help to inform what we will expect to see in the next report.

But the data flow has been tremendously strong. We saw a dramatic increase in retail spend. The claims numbers are improving. Confidence measures are picking up. Manufacturing activity is still warring if you look at the ISM surveys. And just yesterday, we had Empire State and Philly Fed for April, so that's more of a forward looking indicator, both improved. So yeah, I think job creation should be quite robust in April.

MYLES UDLAND: So Michelle, let's go back to the retail sales report that we got yesterday. Obviously, the February report in hindsight was kind of a strange one. And we got some giveback. But as you look at the trajectory for retail sales, how much runway do you think there is, given stimulus, given some reopening trades, and given just the specific sector areas that stood out yesterday?

MICHELLE MEYER: Sure, so a lot to kind of unpack there. I would say the first point around stimulus, certainly the stimulus payments contributed quite a lot to the gain that we had seen in retail sales in March. There was a big jolt to consumer spending, particularly for lower income individuals and particularly to buy things with those stimulus checks. We think the next stage in consumer spending will be much more about the reopening. It will likely be more driven by higher income consumers who have unintentionally been saving because they haven't been living their life in the typical way they have. So they haven't been spending as much on service activities, certainly not on leisure.

As people feel safe to re-engage, as they become able to re-engage from a restrictions perspective, we think that will help to unleash consumer spending. But it's not going to be the same type of pace as we saw from stimulus. Stimulus is a jolt. The reopening is much more of a kind of steady upward pressure that will keep consumer spending running at a very healthy clip, in our view.

BRIAN SOZZI: Michelle, you are at 7% GDP growth for the first quarter. Where are you at now?

MICHELLE MEYER: Yeah, so we're down a little bit. 6 and 1/2% is our real-time tracking, but that changes pretty much every day. When we get more data, our tracking will move. So somewhere around the 7% range seems fair for Q1. And I think as you look forward to Q2, that's where it actually gets even more interesting.

We think it's going to be double digit growth in the second quarter. We're forecasting 10% annualized increase, which will be a kind of peak quarter of the year. And a lot of that growth actually comes from the handoff from March. Because this incredible data throughout the month of March kind of kickstarts the second quarter and translates to what we think will be very, very strong performance from a quarterly perspective.

BRIAN SOZZI: Wow, 10% GDP growth in the second quarter. Where does that take you overall for the full year, Michelle? Are you optimistic on the back half? And so much so, are you at 10% GDP growth for the year?

MICHELLE MEYER: No, so we're at 7% GDP growth for the year if you're measuring on an annual average. If you measure on a Q4 over Q4 basis, just to align to the Federal Reserve, we're looking for 7.7% growth. So that does suggest, as you can imagine, some slowing in the second half of the year. And a moderation makes sense, right? We know that it was kind of this perfect storm of economic activity in the spring from stimulus, from pent-up demand, from people just getting back out and being able to spend. And that creates that kind of level shift higher, which is what's showing up in the data.

Into the second half of the year, we think growth will remain supported. We think we will see further consumer spending. And importantly, we think we'll see CapEx pick up, business investment pick up, and that creates a sustainable, healthy cycle. But nonetheless, you can't continue to grow at 10% growth indefinitely when the trend in the economy slows to 2%. So we do think we'll see some moderation, but above trend growth through the rest of the year.

MYLES UDLAND: And Michelle, how are you guys thinking about the housing market right now? Obviously, the rates story presents one picture, inventory another. Where does that fit into the recovery?

MICHELLE MEYER: Yeah, so we just saw housing starts today, which were kind of a blowout number, for lack of a better word. Very strong housing activity in terms of home building. The homebuilder sentiment survey released yesterday is holding close to a record high. So I think the landscape is very favorable for housing construction. We know inventory levels are at historically low rates. If anybody out there is trying to buy a home, you're probably experiencing this firsthand. Because homes are flipping very quickly. They're moving very, very fast. And that's been creating a lot of upward pressure on home prices.

So there's a need for more building. That said, as we look into the rest of the year, we do think we'll probably see some moderation in home sales relative to the very strong pace we had last year. So, some moderation in demand, strong supply, that's necessary to rebalance the market and take some of the momentum out of home prices.

MYLES UDLAND: And then Michelle, finally, I mean, obviously, with this kind of growth, we're talking around the issue. But just on the exact data that you expect to come in on inflation and where you expect to see some of those biggest price pressures come from and how you're, I guess, preparing through a summer where you're going to have to talk clients through, here's why the Fed might not all of a sudden be raising rates against print x.

MICHELLE MEYER: Yeah. Yeah, so the next two months, as you noted, will remain interesting because growth is strong, inflation's picking up, and yet, the Fed's going to still have this very asymmetric reaction function. And I think that there's going to be two things to look at. One is the components that are driving the increase in inflation. You can discern that pretty quickly from the data. Is it driven by a level reset of prices for airfare, for lodging?

All of these categories that were deflating last year because of weak demand, they should be inflating this year. We know that's a correction that's going to happen. Even core goods prices, we know there's supply chain issues. Those are somewhat temporary, though. It will create upward pressure, but it shouldn't remain. So, I think it's going to be important to look at the drivers of inflation. And you can kind of discern whether or not they're temporary or more persistent increases.

And then, on that note, the second thing I would very-- I would say is very important to monitor is inflation expectations. What do people expect going forward? Because if expectations are rising, transitory becomes permanent because people expect higher prices in the future. So far, inflation expectations have been well contained. We just got the University of Michigan Consumer Sentiment Survey, which showed long-run inflation expectations actually tipped back down a bit to 2.7%, which is well within the range. But if that becomes kind of outsized on the upside, then I think you have more concern about transitory inflation becoming more sticky.

BRIAN SOZZI: Point well taken. Michelle Meyer, Bank of America chief US economist always, good to see you. Have a good weekend.

MICHELLE MEYER: Great to be here. Thanks, Brian. You, too.