Client-centric financial system pushes GDP to six.4% within the first quarter

Economic activity boomed in early 2021 as widespread vaccinations and more fuel from government spending helped bring the US closer to pre-Covid-19 levels, the Department of Commerce reported Thursday.

The gross domestic product, the sum of all goods and services produced in the economy, rose in the first three months of the year by 6.4% on an annual basis. Aside from the spike in reopenings in the third quarter of last year, that was the best period for GDP since the third quarter of 2003.

Economists polled by Dow Jones were looking for a 6.5% increase. The fourth quarter of 2020 accelerated by 4.3%.

“This signals that the economy is up and it is going to be a booming year,” said Mark Zandi, chief economist at Moody’s Analytics. “Obviously, the American consumer is driving the train and companies are investing heavily.”

In a separate report on Thursday, the Labor Department said initial jobless claims fell to a low in the pandemic last week, but the number was higher than expected.

The increase in GDP affected a number of areas including increased personal consumption, fixed investments in residential and non-residential real estate, and government spending. The decline in inventories and exports, as well as an increase in imports, were deducted from profit.

Consumers, accounting for 68.2% of the economy, sped up spending 10.7% in the quarter, compared to a 2.3% increase in the previous period. Spending was mostly focused on goods, which grew 23.6%, but spending on services, which was the missing link in the recovery, still rose 4.6%.

On the merchandise side, spending on durable goods such as home appliances and other long-term purchases exploded by 41.4%.

Thanks to another round of stimulus checks, this time for $ 1,400, consumer spending was high.

While the numbers indicated that many were using the free money on spending, they also put a fair amount of it away as the savings rate rose to 21% from 13% in the fourth quarter.

“With the increased savings rate, households are still cashless, and now that restrictions are relaxed as the vaccination program proves successful, they can increase spending on the worst-hit services without withdrawing too much.” about spending on goods, “wrote Paul Ashworth, chief US economist at Capital Economics.

Imports also continued to grow, increasing by 5.7%, while exports fell by 1.1%. Imports are deducted from GDP.

Government spending and investment increased 6.3%, including a 13.9% increase at the federal level and a 1.7% increase from state and local agencies.

Inventories fell sharply, saving 2.64 percentage points versus GDP gain, mainly due to spending in the US, which outpaced much of the rest of the world. However, that slump in the first quarter is unlikely to fuel overall growth numbers until later.

“The only real drag on the economy will continue to be trade as the US is way ahead of the rest of the world on recovery,” Zandi said. “We’re buying things and the rest of the world isn’t quite there yet. Everything shoots at all cylinders and we run off.”

Still in recovery mode

The latest numbers reflect an economy that has made great strides since the 2020 lockdown, sending more than 22 million American workers to the unemployment line, and whose GDP fell by an unprecedented 31.4% in the second quarter of 2020.

This was followed by a 33.4% recovery in the third quarter. However, the Bureau of Economic Research has still not declared an end to the recession as GDP in US dollars has not exceeded its previous high.

While around 14 million people have returned to work since then, the Federal Reserve estimates that around 8.4 million fewer jobs are currently in place than before the pandemic. The unemployment rate has fallen from its high of 14.7% to 6%, but is still well above the 3.5% in February 2020.

A separate Labor Department report showed an additional 553,000 Americans first filed for unemployment claims last week. This was another low in the pandemic, but it was above the Dow Jones estimate of 528,000. The ongoing entitlements from a week ago increased to 3.67 million, while the total number of benefits from all programs decreased by nearly 850,000 to 16.6 million.

The struggles in the labor market are driving accommodative monetary policy further.

The Fed noted on Wednesday that “economic activity and employment indicators have surfaced lately, although the sectors hardest hit by the pandemic remain weak”.

Fed Chairman Jerome Powell said that while residential activity is above state of affairs and other parts have recovered near pre-pandemic levels, the recovery remains “uneven and nowhere near complete”.

The recovery also reflects previously unheard-of policy stimulus from both the Fed and Congress.

On the fiscal side, Congress, along with a number of other spending programs, allocated around $ 5.3 trillion to improved unemployment benefits, which helped bring the federal budget deficit to $ 1.7 trillion in the first half of fiscal 2021 and the national debt to $ 28.1 trillion. Congress is also considering a $ 1.8 trillion infrastructure plan from the White House.

The Fed also got its way, cutting its short-term policy rate to near zero and buying bonds worth nearly $ 4 trillion, bringing its balance sheet to just under $ 8 trillion.

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