In each quarter’s issue of Owner to Owner, we review aspects of the business environment on three fronts: the overall economy, the credit markets and the private equity (PE) and mergers and acquisitions (M&A) markets. The following article addresses positive indicators for economic performance in 2021, trends in commercial and industrial (C&I) loan issuance and standards and the healthy PE environment.
The U.S. economy has regained its footing and appears poised for significant growth in 2021. Our optimism stems from the triple tailwinds of healthy household finances, easy monetary policy and expansionary fiscal policy meeting a country that is emerging from the COVID-19 pandemic. After a record quarter in the third quarter of 2020, the economy posted solid gains of 4.3% in the fourth quarter and 6.4% in the first quarter of 2021. Looking ahead, the Atlanta Federal Reserve’s GDPNow estimate of second quarter GDP growth stands at 11.0% as of May 7. With GDP less than 1% off its fourth quarter 2019 high, the second quarter is likely to erase all remaining losses from the pandemic and put economic output at a new all-time high.
Various economic indicators also corroborate this optimistic view of growth. Vehicle sales and lumber prices, for example, are in a historic boom and are both emblematic of the strength of the U.S. consumer. In April a seasonally adjusted rate of 18.5 million new cars were sold, the strongest month since July 2005. New housing starts are at their highest level since 2006, and accordingly, lumber prices are off the charts. Lumber futures contracts, which traded at $495 before the pandemic, now stand at $1,670.1
While many businesses have suffered as a result of the pandemic, much of this distress is centered on a handful of industries at the epicenter of crisis, and the U.S. corporate sector on the whole is strong. 2020 saw a wave of bankruptcies, though aggressive policy actions helped stave off the worst. As seen in the nearby table, a relatively small number of industries representing only 12% of the private sector saw output declines greater than 10% over the full year in 2020. All other industries were either down modestly or had already surpassed their pre-pandemic peak in output by the end of last year. Today, the corporate sector is well capitalized, and bankruptcies have returned to normal levels. Using the S&P Composite 1500, an index composed of small-, mid- and large-capitalization U.S. stocks, as a barometer, corporate earnings also appear strong. With the majority of the index reporting, first quarter 2021 operating earnings are expected to be up 27% over the two years since first quarter 2019.2 Similarly, estimates call for full-year 2021 earnings to grow 21% vs. 2019.