by Louis Navellier
April 13, 2021
We are now essentially in “economic nirvana.” Let me give you some examples. On Wednesday, the Atlanta Fed raised its first-quarter GDP estimate to a 6.2% annual pace, up from 6% previously estimated. The U.S. is still expected to boost the global GDP growth rate more than China in 2021, for the first time since 2005. Since the U.S. is a robust consumer-driven market, the U.S. has the potential to keep pace and exceed China’s overall GDP growth in 2021, since the U.S. economy is about one-third larger than China’s.
Here’s another example: March retail sales (to be released Thursday) are expected to be stunning due to the $1,400 stimulus checks that were sent out by the federal government. The $600 debit cards that were sent out by the federal government caused retail sales to soar 7.6% in January, so the expectations for March retail sales are even higher! Another example of how strong the U.S. economy is: some container ships must wait up to eight days at some U.S. ports to unload their goods due to robust consumer demand!
As I reported last week, the Labor Department announced that a whopping 916,000 new payroll jobs were created in March, the biggest monthly gain since August and well above economists’ consensus estimate of 675,000. In addition, the January and February payroll reports were revised higher by over 150,000 jobs so that we created at least 1,617,000 jobs in the first quarter and reduced the jobless rate to 6.0%.
Especially encouraging was that hotels and restaurants added 280,000 jobs in March as many states lifted Covid-19 restrictions. Interestingly, average hourly earnings declined 0.1% in March, which indicates that many lower-wage workers returned to the workforce. There still remains a problem with many education jobs and working parents being unemployed due to school closures, but many companies are starting to report labor shortages, so I expect strong payroll growth to continue in the upcoming months.
After announcing that its manufacturing index reached a 37-year high last week, ISM announced that its non-manufacturing (service) index surged to an all-time high of 63.7 in March, up from 55.3 in February. The previous high for the ISM service index was 60.9 in October 2018. All 18 service sectors surveyed by ISM reported growth. The strongest ISM components were business activity/production, which surged to 69.4 in March (up from 55.5 in February); also, new orders soared to 67.2 in March (up from 51.9 in February). These dramatic monthly gains are amplified by “the big freeze” in the U.S. in February, but the fact that the ISM service index surged so high illustrates much more than just a temporary recovery.
All this positive economic news caused the International Monetary Fund (IMF) to raise its 2021 U.S. GDP forecast by a giant step to 6.4% (from 5.1% previously estimated). That would represent the strongest annual economic growth rate since 1984. The IMF is also forecasting 4.4% 2021 GDP growth for the eurozone – the 19 countries that use the euro. Interestingly, the eurozone is expecting to achieve “herd immunity” by June, despite a much slower vaccine rollout than Britain and the U.S., so they are still currently restricting their respective economies. The strongest forecasted GDP growth by the IMF in 2021 is 12.5% for India (with a fiscal year ending in March 2022) and then +8.4% for China (up from 8.1% previously estimated). Also notable is that the IMF is forecasting 3.3% 2021 GDP growth for Japan.
The one warning flag is inflation. The Labor Department announced on Friday that the Producer Price Index (PPI) rose 1% in March (a 12% annual rate), substantially higher than the economists’ consensus expectation of a 0.5% increase. Wholesale energy prices rose 5.9%, while food prices rose 0.6%. Excluding food, energy, and trade margins, the core PPI in March rose 0.6%. In the past 12 months, the PPI and core PPI have risen 4.2% and 3.1%, respectively. The PPI declined from April through August of 2020, during the height of the pandemic, so the year-over-year comparisons are going to be much more dramatic in the next few months. Clearly, the Fed has succeeded in “sparking” wholesale price inflation, so we now have to see if this inflation is “transitory,” which is how the Fed has previously described it.
Treasury Secretary Yellen and President Biden Are Keen on Raising Corporate Taxes
There was a G-20 meeting last week on “tax harmonization.” Treasury Secretary Janet Yellen called for a Global Tax Agreement on corporations, which was positively received by the European Union (EU). The EU has tried to impose additional taxes on some U.S. technology companies headquartered in Ireland. It looks like the Biden Administration is trying to resolve this tax uncertainty question early in his first term. The EU also likes the fact that Secretary Yellen is calling for a minimum corporate tax. The Organization for Economic Cooperation & Development (OECD) has been calling for a 12.5% minimum corporate tax, but Secretary Yellen and President Biden would like to double that rate by calling for a raise in U.S. corporate taxes from 21% to 28%, even if it impacts U.S. competitiveness.
Speaking of taxes, there remains a lot of infighting within Congress because the Biden Administration did not propose raising the state and local tax (SALT) deduction limit from $10,000, which hurts many higher income tax (“blue”) states that continue to suffer from an exodus to one of the several states with no state income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). Naturally, raising federal income taxes without a higher SALT deduction would just increase the exodus to states with no income tax. What really makes America great is that our respective states can compete with each other for business, so I expect the pro-business states to continue to prosper!
The Semiconductor Supply Glitch is Slowing Down the Auto Industry
The big news on Friday was that Ford and General Motors announced that they are idling or extending plant closures due to the ongoing semiconductor chip shortage. These semiconductor chips are used in infotainment systems, electric power steering, braking systems, stop/start engine management, and other vehicle control systems. Both Ford and GM are prioritizing high margin vehicles, like luxury pickup trucks and SUVs, during this semiconductor chip shortage, so plants that make lower margin vehicles, like crossovers, are increasingly being idled. Since global supply chains are fragile, the long-term outlook for U.S. manufacturing remains bright, because we need components to be built closer to assembly plants.
After the semiconductor chip shortage is resolved, the next industry crisis is expected to be the lithium battery shortage. VW Group announced during its “Power Day” that premium lithium batteries with cobalt, which is in scarce supply, will be reserved for its premium vehicles, like Porsches, while cobalt-free batteries will be used in lower-priced electric vehicles.
Interestingly, Tesla is utilizing cobalt-free batteries at its Shanghai plant, and even though these vehicles do not have the range of its other electric vehicles that have Panasonic lithium batteries with cobalt, the company just posted record sales in China and strong sales in Europe with these lower-range EVs.
The primary reason that you have to wait to get a Hummer EV is that the batteries from LG Chem to make the Ultium battery packs are not yet available. Clearly, VW Group is keenly aware of the impending lithium battery shortage, since it just announced six Giga-factories during its Power Day with partners in Europe to improve its future supply chain. In the U.S., LG Chem and SK Innovations are expected to dominate the supply of lithium batteries through new manufacturing plants being developed.
The other supply glitch is that LG Chem and SK Innovation were fighting over trade secrets at the International Trade Commission (ITC). LG Chem won this fight, and the ITC imposed a 10-year ban on imports from SK Innovation which further complicates the U.S. supply chain. SK Innovation has a massive new lithium battery plant in Georgia and received ITC approval to sell to Ford for four years and VW Group for two years, but clearly SK Innovation must eventually settle with LG Chem to resolve the ITC ban; so I expect that lithium battery shortages will persist for several years, especially in the U.S.
Navellier & Associates owns Tesla (TSLA) in 1 account, per client request in managed accounts. We do not own General Motors (GM), VW Group, Panasonic, or Ford (F). Louis Navellier does not own Tesla (TSLA), General Motors (GM), VW Group, Panasonic, or Ford (F).