April 29, 2021 | 09:12
U.S. Real GDP (2021 Q1 Advance) — Liftoff
Fueled by massive policy stimulus, the U.S. economy rocketed 6.4% higher (annualized) in the first quarter, up from 4.3% in Q4, and looks to grow even faster in the current period as restrictions continue to ease and more of the population gets vaccinated.
The increase in real GDP was just shy of the consensus view as well as our 7% call, but no complaints here. The economy is now performing 0.4% above year-ago levels, and, while still down 0.9% from late 2019, should more than fully recover this loss in the current quarter. The burst of growth came despite widespread snowstorms and regional blackouts mid-quarter, and some shuttering of auto plants due to chip shortages. Perhaps more importantly, the economy was still partly shut for most of the quarter, with most states more fully easing restrictions after mid-March...this implies even more of a bounce in Q2 GDP.
The Q1 gain reflects thetwo rescue bills passed since late December, easing pandemic restrictions, speedy vaccinations, and unleashed pent-up demand fueled by massive excess household saving. In fact, households piled up $4.1 trillion in savings, with the saving rate pole-vaulting to 21.0% from 13.0% the prior quarter. That's what happens when personal income skyrockets a record 59% annualized in one quarter. Yet, households still spent 10.7% more, largely on durable and non-durable goods, and to a lesser extent (slowly reopening) services. Businesses also spent freely, notably on equipment and software, pushing nonresidential investment up 9.9%. And a little snow (OK a lot of snow in February) couldn't stop residential construction from jumping 10.8%, with housing starts hitting 15-year highs in March. The federal government also racked up a 13.9% increase in spending (adding 0.9 ppts to GDP growth), boosted by payments to banks for processing Paycheck Protection Program loan applications and for buying vaccines. Spending turned higher for state and local governments as well, albeit modestly.
The three weak spots in the quarter were inventory disinvestment (which carved 2.6 ppts from GDP growth) and a record trade deficit (slicing 0.9 ppts), as exports fell modestly (partly due to the Euro Area's recession) while imports rose 5.7% on the burst of domestic demand. As well, nonresidential structures spending continued to contract, albeit less than in prior quarters, reflecting weakness in retail and office building.
Also notable is that nominal GDP jumped 10.7% annualized in Q1, as prices accelerated. That's the biggest increase (apart from the 2020 Q3 pop) in nearly four decades. Core PCE prices picked up to a 2.3% annualized rate from 1.3% in Q4, and will be the focus of much scrutiny in coming months.
One standout stat in the report is that real final sales to private domestic purchasers soared 10.6% in the quarter, which was nearly double the prior quarter's pace. With the economy gaining momentum and restrictions easing (even New York City is looking to fully reopen on July 1), expect GDP to advance even faster in Q2.