US economy’s 6.4% Q1 growth signals stellar year

Diners at Truck Yard beer garden in Houston, Texas, on April 9, 2021. PHOTO: AFP

WASHINGTON (NYTIMES) - US consumers shook off the pandemic blues as 2021 began, putting stimulus cheques to work buying cars and other goods and helping set the stage for what could be the fastest economic growth in decades.

The initial reading on the country's first-quarter economic performance, delivered on Thursday (April 29) by the Commerce Department, showed that much remained far from normal. Even with a big jump in personal income, there was only a modest increase in spending on services like travel, dining and even health care.

But economists say that is already changing as more vaccinations are delivered and coronavirus-related business restrictions are eased. With better weather, savings accumulated during a long year of lockdowns, and an itch to make up for forced inactivity, Americans will have plenty of reasons to go out and spend.

"Consumers are now back in the driver's seat when it comes to economic activity, and that's the way we like it," said Gregory Daco, chief US economist at Oxford Economics. "A consumer that is feeling confident about the outlook will generally spend more freely."

Overall, the broadest measure of the economy - gross domestic product - grew by 1.6 per cent in the first three months of 2021, compared with 1.1 per cent in the final quarter of last year. On an annualised basis, the first-quarter growth rate was 6.4 per cent.

Total economic output should return to pre-pandemic levels by summer - in fact, Mr Daco believes it has already done so. His firm estimates that the economy will expand by 3.1 per cent in the second quarter, or about 13 per cent on an annual basis. For the year, it expects growth of 7.5 per cent, the best performance since 1951.

"This may be the tip of the iceberg," Mr Daco said. "I think we will see much stronger momentum into summer as health conditions continue to improve, policy support remains in place and employment strengthens."

Helped by several rounds of government relief payments, households were sitting on a collective US$4.1 trillion (S$5.4 trillion) in savings in the first quarter, up from US$1.2 trillion before the pandemic began.

That should find its way into the economy as services that were mostly off-limits come to life and customers flock to reopened establishments. Daco expects consumer spending to grow by more than 9 per cent this year, a record.

The expansion last quarter was spurred by two batches of government payments to most Americans - US$600 a person from a relief package enacted just before the end of 2020, and US$1,400 more from legislation approved in March. That quickly translated into purchases of cars, furniture and household appliances, as well as clothes and food.

There was a similar jump in income last year after the first round of relief checks, which also caused a bounce in spending on goods.

"To some extent, when people have money, they're going to spend it," said Ben Herzon, executive director of IHS Markit, a forecasting firm. "If they're not spending on services because they're not going to movies or amusement parks, they're going to derive utility from goods."

He said he expected spending on goods to ease in the second quarter as services spending begins to rebound more strongly.

Consumer spending rose 2.6 per cent in the first three months of the year, with a 5.4 per cent increase in purchases of goods accounting for most of the growth. Spending on services, which has slumped throughout the pandemic, rose by 1.1 per cent.

"This demonstrates the value of government intervention when the economy is on its knees from COVID," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "But in the coming quarters, the economy will be much less dependent on stimulus as individuals use the savings they've accumulated during the pandemic."

The economy's underlying strength has been evident in the robust corporate earnings that many companies have been reporting in recent days. After the stock market closed Thursday, Amazon announced that its profit more than tripled last quarter to more than US$8 billion, while sales jumped 44 per cent to US$108.5 billion.

One striking aspect of the quarter's economic activity was spending on motor vehicles and parts, which increased by almost 13 per cent from the previous three months. Strong consumer demand and tight inventories drove prices higher.

Low interest rates, readily available credit, rising home values and stock prices, and strong trade-in values for used models are also easing the path for consumers.

At AutoNation, the country's largest dealership chain, many vehicles are being sold near or at sticker price even before they arrive from the factory. "These vehicles are coming in and going right out," said Mike Jackson, the chief executive.

Even if economic output is back to where it was before last year, as Mr Daco estimates, it is short of where it would be without the pandemic. What's more, economists say it is likely to take until sometime next year for employment to regain the ground it lost as a result of the pandemic.

The labour market underscores the uneven distribution of economic pain. White-collar employees have been able to make a smooth transition to working from home and relying on services like Netflix and DoorDash for their needs, but blue-collar workers and less-educated Americans have been hit hard. And while household savings overall have swelled, many families have seen their finances wiped out.

The unemployment rate for high school graduates was 6.7 per cent in March, while it stands at 3.7 per cent for Americans who hold a college degree. Members of minority groups have also suffered heavily, with the jobless rate for Black Americans at 9.6 per cent, compared with 5.4 per cent for whites.

Still, hiring does seem to be catching up. Last month, employers added 916,000 jobs and the unemployment rate fell to 6 per cent, while initial claims for unemployment benefits have dropped sharply in recent weeks. On Thursday, the Labor Department reported that initial claims for state unemployment benefits had fallen to the lowest level of the pandemic for the third consecutive week.

Tom Gimbel, chief executive of LaSalle Network, a recruiting and staffing firm in Chicago, said: "It's the best job market I've seen in 25 years. We have 50 per cent more openings now than we did pre-Covid."

Hiring is stronger for junior to midlevel positions, he said, with strong demand for professionals in accounting, financing, marketing and sales, among other areas. "Companies are building up their back-office support and supply chains," he said. "I think we're good for at least 18 months to two years."

Ample savings and rising consumer optimism are giving businesses the confidence to bet on the future as well. Business investment rose 2.4 per cent in the first quarter and surpassed its prepandemic level. Residential construction spending rose 2.6 per cent.

Economic growth would have been even stronger had it not been for a fall in inventories, said Michael Gapen, chief US economist at Barclays. Supply chain constraints and shortages of parts like semiconductors are causing halts in production, he said, most notably in the automobile sector.

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