GDP: Strong First Quarter is Foretaste of More to Come

GDP will likely grow by 6.6% or more this year because of the additional fiscal stimulus passed by Congress. The stimulus checks last month boosted personal disposable income by 67% at a yearly rate, which led to a 10.7% gain in consumer spending in the first quarter. The quarterly savings rate jumped to 21%, far above the normal level of 7.5%, indicating that more spending is on tap later in the year.

Strong GDP growth of 6.4% in the first quarter will be typical for the rest of the year. Consumers bought big-ticket items and other retail goods freely. Spending on dining out and recreation services surged, and is only beginning a strong upward trend. Travel will be picking up, as well.

Businesses increased spending on equipment. Their inventories dropped, but that is because sales were so high, and companies are having trouble keeping up with demand. Housing construction rose again, to its highest level since 2007. All of this spending worsened the trade deficit, since much of it went to imported goods.

An encouraging sign is that state and local spending rose for the first time since the pandemic hit. State and local governments had cut back because of uncertainty over tax revenues last year, but those fears are beginning to ease. The main concerns for GDP growth at this point are that commercial and other non-housing construction is still declining, and that exports dipped, a sign that the pandemic is still causing economic trouble around the world.

Source: Department of Commerce: GDP Data