Flaherty & Crumrine Preferred Securities Income Fund : & Crumrine First Quarter 2021 US Economic Update

First-Quarter U.S. Economic Update

May 2021

Summary of Recent Economic and Market Developments

Economic growth rose unexpectedly in the first quarter as vaccinations expanded and new COVID-19 cases declined sharply. In real GDP terms, the U.S. economy should surpass its prior peak sometime this quarter. Job growth accelerated and the unemployment rate fell, although total employment remains about 8.2 million jobs below its peak. Personal income soared, boosted by two rounds of stimulus payments. Personal consumption expenditures also rose substantially (+10.7% in Q1) but did not keep pace with income, adding to personal savings. Those savings should help sustain strong personal spending growth this year. Residential investment rose briskly, but limited availability of homes for sale dampened sales in recent months and drove home prices higher. Industrial production was hampered by cold weather and supply chain disruptions, but orders suggest rising output ahead. Business investment rose. Government spending surged, and monetary policy remained extremely loose. Inflation rose sharply and helped drive interest rates up substantially, while faster economic growth brightened an already solid credit outlook and narrowed credit spreads.

Figure 1: Key Macroeconomic Indicators and Interest Rates

Economic Indicator*	2021:1	2020:4	2020:3	2020:2	2020:1	2019:4	2019:3	2019:2
Real GDP, Chg QoQ (%, SA, AR)	6.4	4.3	33.4	-31.4	-5.0	2.4	2.6	1.5
Real Personal Consump Expnds, Chg QoQ (%, SA, AR)	10.7	2.3	41.0	-33.2	-6.9	1.6	2.7	3.7
Real Business Inv ex Stuctures, Chg QoQ (%, SA, AR)	13.0	17.5	34.4	-25.5	-7.4	0.9	1.5	-0.4
Real Residential Investmt, Chg QoQ (%, SA, AR)	10.8	36.6	63.0	-35.6	19.0	5.8	4.6	-2.1
Real Private Domestic Final Sales, Chg QoQ (%, SA, AR)	10.6	5.5	38.7	-32.2	-5.7	1.5	2.7	2.9
Nominal GDP, Chg QoQ (%, SA, AR)	10.7	6.3	38.3	-32.8	-3.4	3.9	4.0	4.1
Corporate Profits, After Tax, Chg YoY (%, SA, AR)	11.8f	-2.4	2.8	-18.8	-5.7	1.3	-0.3	0.5
Nonfarm Productivity, Chg QoQ (%, SA, AR)	5.4	-3.8	4.2	11.2	-0.8	1.6	0.5	1.9
Nominal Personal Income, Chg YoY (%, AR)	29.0	3.7	6.0	8.2	1.8	2.9	3.5	3.8
Personal Savings Rate (%, SA)	27.6	13.5	14.1	19.0	12.9	7.2	7.3	7.1
Unemployment Rate (%, SA)	6.0	6.7	7.8	11.1	4.4	3.6	3.5	3.6
Nonfarm Payrolls, Chg QoQ (000, SA)	1,539	638	4,025	-13,000	-1,079	590	609	457
Household Employment, Chg QoQ (000, SA)	1,018	2,287	5,443	-13,436	-3,199	505	1,099	322
Federal Budget, 12-moDeficit(-) or Surplus (% of GDP)	-19.9	-16.5	-15.5	-14.8	-4.8	-4.8	-4.7	-4.4
Consumer Price Index, Chg YoY (%, AR)	2.6	1.4	1.4	0.6	1.5	2.3	1.7	1.6
CPI ex food & energy, Chg YoY (%, AR)	1.6	1.6	1.7	1.2	2.1	2.3	2.4	2.1
Capacity Utilization (%, SA)	74.4	74.7	72.5	68.9	73.6	77.2	77.4	77.7
Rate or Spread (End of Quarter)	2021:1 2020:4 2020:3 2020:2 2020:1 2019:4 2019:3 2019:2
Federal Funds Rate Target (upper bound, %)	0.25	0.25	0.25	0.25	0.25	1.75	2.00	2.50
3-month LIBOR (%)	0.19	0.24	0.23	0.30	1.45	1.91	2.09	2.32
10-Yr Treasury Note Yield (%)	1.74	0.93	0.69	0.66	0.70	1.92	1.68	2.00
30-Yr Treasury Bond Yield (%)	2.41	1.65	1.46	1.41	1.35	2.39	2.12	2.52
ICE-BofAML US Corporate Index Spread to Worst vs Gvt	91	98	139	155	302	99	120	121
10-Yr Interest Rate Swap Spread (bp)	3.6	0.8	2.5	-1.8	2.5	-2.8	-10.5	-4.5
* Figures are either quarterly or, if more frequent, end of period.	f = Forecast1 ; N/A = not available	Source: Macrobond, ICE, Bloomberg LP

Legend for all Figures: AR = Annual Rate; SA = Seasonally Adjusted; MA = Moving Average; C.O.P. = Change over Period

First-Quarter U.S. Economic Update

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May 25, 2021

Economic Outlook

Springtime arrived early for the U.S. economy as rapid progress administering vaccines and a sharp downturn in new COVID-19 cases prompted relaxation of restrictions on both businesses and consumers over the course of the first quarter. Most forecasters expected economic growth would slow over the winter months; instead, it accelerated. Inflation- adjusted gross domestic product (real GDP) rose by 6.4% in Q1, following a 4.3% gain in Q4. Economists also raised their GDP growth forecasts for the rest of 2021 to 9.3% in Q2 and 6.6% for 2021 overall, 1.7% higher than February's consensus forecast.1 Stronger U.S. growth is also expected next year, with the consensus 2022 GDP forecast rising to 4.3% today from 3.7% in February.

An earlier and stronger rebound means the U.S. economy will surpass 4Q2019's level of real GDP during the current quarter (it fell just short in Q1). Moreover, if current GDP forecasts are correct, the U.S. economy will recoup growth lost to the pandemic by the end of this year. Specifically, if real GDP had continued to expand at a 2.0% rate each quarter since 4Q2019, it would have grown to $20.03 trillion at year-end 2021, which is slightly below the current consensus forecast of $20.07 trillion for 4Q2021 GDP. That would be several years earlier than expected using forecasts from last summer. It reflects almost unimaginable scientific and therapeutic progress against COVID-19, extraordinary fiscal and monetary support, and a dynamic and flexible economy. Let's see how it happened.

The labor market recovery accelerated throughout the first quarter, with large employment gains arriving several months earlier than expected, in part due to rapid deployment of COVID vaccines. Nonfarm payrolls jumped by 1.54 million jobs in Q1 and added 266,000 in April, leaving overall nonfarm employment at 144.3 million (Figure 2). Despite that growth, total nonfarm payroll employment remains 8.2 million jobs below the February 2020 peak and roughly 10 million below where it might have been absent the pandemic. As more segments of the economy reopen or expand capacity, businesses will be looking to add more workers, and strong employment growth should continue.

There is a caveat, however. Job openings have significantly outpaced hiring in recent months, leaving some 8.1 million unfilled jobs in March, up from 6.75 million in December 2020. This is unusual when unemployment is relatively high: 6.1% in April compared to 3.5% in February 2020 (Figure 3). Reasons for slower uptake of available employment could include concerns over contracting COVID while working, need to remain home to care for another household member (especially children unable to attend school in person), and willingness to remain on unemployment benefits rather than taking a job.2 Those headwinds should diminish over

• Unless noted otherwise, forecasts are from the Survey or Professional Forecasters, Federal Reserve Bank of Philadelphia, February 12, 2021 and Bloomberg® U.S. Monthly Economic Survey, May 14, 2021.
  2 Persons receiving unemployment insurance fell from 5.18 million in the week ending December 27, 2020 to 3.84 million as of March 13, 2021, a decline of 1.34 million over 11 weeks. On March 11, supplemental unemployment benefits of $300 per week were extended from March 14 to September 6 under the American Rescue Plan Act. Over the next eight weeks to May 8 (latest data available), continuing claims fell by only 100,000

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coming months as COVID vaccinations expand, in-person school resumes and care providers become more widely available, and supplemental unemployment benefits expire, increasing financial incentives to work. Of course, there are some longer-term headwinds too, including skill or geographical mismatches between job openings and job seekers, as well as early retirements or other permanent or long-term withdrawal from the labor force. Nonetheless, some of the temporary headwinds are likely to remain in place through the summer months, and job growth may lag demand for a time.

Figure 2: Jobs Recovering; More to Do

	Levels of Employment and Initial Jobless Claims
	160	6
	155	5
		151 million
million	150	4	of .No
ofNo.Persons,	140		millionPersons,
	145	144 million
		2
	135	1
		504750
	130	0
	Jan Feb Mar Apr May Jun Jul	Aug Sep Oct Nov Dec Jan Feb Mar Apr May
	2020	2021

Unemployment, National, Jobless Claims, Initial, Total, 4 Week Moving Average, rhs Employment, National, 16 Years & Over, lhs

Employment, Payroll, Nonfarm, Payroll, Total, lhs

Source: Macrobond

Figure 3: Unemployment Down; Wages Mixed

	U.S. Wage Growth and Unemployment Rate
	15		9
	14		8
	13			YoY
	12		7
Percent			orWage
11		6
Rate,Unemployment	10		2	PercentGrowth,Earnings
			5
	9
	8		4
	7		2.7
	6		6.1
	5
	4		1
	3		0.3
		0
	Jan Mar May Jul Sep Nov	Jan Mar May Jul Sep Nov Jan	Mar May
	2019	2020	2021

Employment Cost Index, Wages & Salaries, Civilian Workers, Total, Index, rhs [c.o.p. 1 year] Earnings, Average Hourly Earnings, Total Private, SA, USD, rhs [c.o.p. 1 year]

Unemployment, National, 16 Years & Over, Rate, SA, lhs

Source: Macrobond

Strong labor demand should encourage wage increases. For now, the picture on wages is mixed (Figure 3). Average hourly earnings growth slowed sharply in March and April, although that largely reflects changes in employment composition. Higher-wage workers who could work remotely boosted average hourly earnings at this time last year. Today, lower-wage employees are returning to work - especially in leisure and hospitality, where there has been rapid job growth since February -and average hourly earnings growth slowed. The employment cost index, which adjusts for compositional shifts, shows wage growth near its pre-pandemic pace, which is impressive given much higher unemployment today. We expect wages to rise and boost income over coming quarters. It could also invite inflation, which we will discuss later.

Fueled by two rounds of fiscal stimulus3, personal income soared in the first quarter (Figure 4). Nominal personal income, which includes transfer payments, rose 59% annualized in Q1 and 29% over 12 months ending in March 2021. Wage and salary income over the same periods was less eye-popping at 6.7% and 4.4%, respectively, but it is still impressive -

even as initial jobless claims declined rapidly (Figure 2). That does not mean extended unemployment benefits caused the slower transition to work, but they are an incentive to remain unemployed, and the timing is curious.

• $900 billion in stimulus relief included in the Consolidated Appropriations Act of 2021 passed on December 27, 2020 followed by the $1.9 trillion American Rescue Plan Act of 2021, passed on March 11. The bills authorized payments to individual taxpayers of $600 and $1,400, respectively, among other provisions.

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May 25, 2021

particularly over the one-year period given substantially lower total employment today. Transfer payments provided major support to households through the pandemic, totaling $5 trillion over 12 months ending in March, $1.8 trillion higher than the same period a year earlier. While additional transfer payment benefits have been proposed, it is unlikely that they will increase so substantially over coming quarters. Low interest rates are likely to hold down investment income as well. Personal income growth will have to come primarily from wage & salary and proprietors' (i.e., businesses owners') income. Employment and wage gains should drive the former, and rising demand as consumers and businesses boost spending should drive the latter.

Figure 4: Income, Spending Soar on Stimulus

Nominal Personal Income, Consumption and Savings, YoY

	35		29.0
			25
	30		20
			PercentGrowth,Spending& Income
			27.6
PercentRate,Savings	25		15
		11.0
	20		4.4
			0
	15		-5
	10		-10
			-15
	5		-20
	Jan Mar May Jul Sep Nov Jan	Mar May Jul Sep Nov	Jan Mar May
	2019	2020	2021

Total, Personal Saving Rate, lhs

Personal Outlays (PCE), Overall, Total, Current Prices, AR, SA, USD, rhs [c.o.p. 12 months] Income Approach, Employee Wages & Salaries, Total, SA, AR, USD, rhs [c.o.p. 12 months]

Personal Income, Total, USD, rhs [c.o.p. 12 months]

Source: Macrobond

Figure 5: Spending on Goods Jumped

Retail Sales (Nominal), 3-mo Moving Averages

	100
	75
Percent	50
								39.8
								30.7
Retail Sales,
25								24.1
0
	-25
	-50
	Jan	Mar	May	Jul	Sep	Nov	Jan	Mar	May
				2020				2021

Retail Control Group, Trend Adjusted

Retail Sales & Food Services, Excluding Motor Vehicle & Parts & Gasoline Stations Retail & Food Services Sales, Total

Source: Macrobond

Flush with income, households spent freely in the first quarter as more parts of the economy reopened. Nominal Personal consumption expenditure (PCE) rose 14.6% in Q1 and 11.0% over 12 months ending in March 2021 (Figure 4). Adjusted for inflation, real PCE rose by 10.7% in Q1 and 8.5% YoY. Spending on goods was particularly strong. Retail sales, which are weighted more toward goods rather than services, rose 35.2% in Q1 and 39.8% over three months ending in April compared to the prior 3-month period (Figure 5). Although retail sales were flat in April, they were still 17.9% higher than in February 2020. With employment and wages rising and more opportunities to engage in activities that were restricted earlier in the pandemic, consumption growth should remain a bright spot for the economy. In addition, record stock prices and rising home values add to consumer wealth; they too should support consumer spending this year.

Despite large PCE gains, income substantially outpaced spending in the first quarter. That pushed the savings rate up to 21.0% in Q1 overall and 27.8% in March, second only to a record 33.7% savings rate at the height of lockdowns in April 2020 (Figure 4). The high amount of personal savings - some $4.1 trillion in Q1 compared to $1.2 trillion in 4Q2019 - should provide additional support to consumer spending over coming quarters.

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The housing market continued to grow solidly in the first quarter, although low inventory of homes for sale as well as homebuilding material and labor shortages limited gains relative to very strong demand. Combined new and existing home sales averaged 7.3 million units in Q1 and slipped to 6.7 million in April, down from an average of 7.6 million in 4Q2020 (Figure 6). Homes available for sale fell to an average of just 1.35 million units, or 2.2 months' supply, in the first quarter. It rose to 1.5 million (2.6 months' supply) in April. Although mortgage rates rose modestly, they remain low, and demand for homes was robust, especially outside urban areas. Not surprisingly, home prices jumped. The S&P/Case-Shiller20-city composite home price index was up 13.3% over 12 months ending in March (latest data available), much faster than just a few quarters ago (Figure 6).

Despite a modestly slower pace of home sales, residential investment rose 10.8% in the first quarter as homebuyers spent to update their newly purchased homes. In addition, a tight market convinced other homeowners to stay put and renovate their existing homes, which also adds to residential investment. Strong demand and rising prices will generate a supply response (i.e., more building), but it takes time to acquire land, obtain permits, and build homes before they can be sold. Residential investment should remain a bright spot for the economy over the next several years.

Figure 6: Sellers' Market for Houses

Figure 7: More Gains in Residential Investment

		New + Existing Home Sales, Inventories and Prices
	14			8
percent	12			13.3	New
	13
				7
Index,YoY				6.71 million	Existing+
10
	11
				6
Price	9			5	Home
Home	8				Sales
city-	7			4	and
S&P/Case-Shiller 20	3				millionInventory,
	6
				3
	5
	4			2
				1.48 million
	2			1
	Jan Apr Jul	Oct Jan Apr Jul Oct	Jan Apr Jul Oct	Jan Apr
	2018	2019	2020	2021

S&P/Case-Shiller20-city composite Home Price Index, lhs [c.o.p. 1 year] Inventory of New + Existing Homes for Sale, rhs

United States, Real Estate Transactions, New + Existing Home Sales, SA, Volume, rhs Source: Macrobond

Residential Investment, Change P/P

	70
	60
	50
	40
	30
Percent	20
10	10.8

0

-10-20

-30

-40

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

2018

2019

2020

2021

Gross Private Domestic Investment, Fixed, Residential, Current Prices, SA, AR, Change P/P

Source: Macrobond

Industrial production rose only modestly in the first quarter, hampered by a sharp decline in output in February as unusually cold weather caused power outages and production shutdowns in many areas, particularly in Texas. Industrial output rose 1.2% in Q1 but slipped 3.2% over three months ending in April compared to the prior 3-month period (Figure 8). Output remained down 2.7% in April compared to its pre-pandemic peak in February 2020, However, forward-looking data suggest industrial production should surpass that level soon. The Institute for Supply Management's manufacturing survey was at 60.7% in April 2021 (50% is neutral) showing orders growing, backlogs rising and inventories falling. Factory orders were up 18.3% in Q1, and orders for core capital goods (nondefense, excluding aircraft) were

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