WASHINGTON – Just a year after a new coronavirus blew a crater-size hole in the U.S. economy, the recovery gained momentum in the first quarter as growth surged at a strong 6.4% annual rate, government data released Thursday show.
Economists and government policymakers believe there’s more good news to come. The rebound is likely to grow even stronger in the months ahead, restoring millions of jobs and putting the nation on track in 2021 for the fastest growth since the 1980s.
What is expected to keep the boom going are the combined effects of massive federal spending proposed by President Biden, greater vaccination rates that will encourage millions of people to resume spending and billions of dollars in COVID-inspired savings and pent-up demand.
There are some caveats that accompany the rosy forecasts, including product shortages, bottlenecks and higher prices, especially in sectors such as construction, auto and other industries struggling to meet demand for materials such as lumber and semiconductors.
Both personal income and the saving rate rose sharply in the first quarter, as did the price of goods. A key measure of inflation reached 3.5% compared with 1.5% in the fourth quarter. Prices for many goods and services are expected to rise this year with the booming economy, but most economists see the increase as transitory.
In releasing the data Thursday, the Commerce Department said the 6.4% growth in gross domestic product, the value of all the goods and services produced in the nation, “reflected the continued economic recovery, reopening of establishments, and continued government response related to the COVID-19 pandemic.”
Inflation-adjusted, or real, GDP rose at a 4.3% annual rate in last year’s fourth quarter.
By GDP, the recovery from the worst downturn since the Great Depression is almost complete. With the first-quarter growth, real GDP was only fractionally below where it was at the end of 2019 before COVID-19 hit.
Thus far, the U.S. recovery has been felt mostly by corporations and higher-income individuals who have benefited from ultra-low interest rates and other factors that have propelled stock prices, home values and company profits.
The nation as of last month had 8.4 million fewer jobs compared with February 2020, just before the pandemic shut down large swaths of the American economy.
Unemployment remains especially high among workers in restaurants and other lower-wage services, people without any college, Black and Latino people, and persons with a disability.
Many of the jobless have been staying afloat financially through enhanced unemployment benefits and other government support.
“The recovery remains uneven and far from complete,” Federal Reserve Chair Jerome H. Powell said Wednesday.
The good news is that as economic activity gains speed — double-digit annualized growth may be seen this spring and summer — the recovery should spread more to lower-income households, who were hit particularly hard by the pandemic.
A resurgence of the virus, however, could change the outlook. And not all companies are responding to the economic pickup by calling back all workers. Many are looking for ways to produce more with fewer people as companies have recently boosted productivity-enhancing investments such as software and equipment, including robots.
Efforts are also underway in some parts of the economy to reduce dependence on global supply chains, especially with China. Those efforts take time and could slow the pace of recovery.
Even so, by most accounts, the U.S. economy this year is set to grow at an exceptionally fast rate of around 7% or more for the year, outperforming other developed nations and possibly even surpassing China’s growth for the first time in many years.
Consumer spending is the locomotive; it jumped at a 10.7% annual rate in the first quarter, driven by purchases of autos, and food and beverages.
Housing and business investments, which in recent years had underperformed, also have become strong engines for growth.
The one exception is trade, which is acting as a drag on GDP because U.S. imports are outpacing exports, thanks largely to purchases for goods online. First-quarter GDP growth also was held back by a drop in inventories, reflecting in part various bottlenecks and cautious rebuilding of stocks, but the pullback early this year will likely add to growth in the spring and summer.
The first-quarter report captured only the start of the outpouring of federal relief funds, which included $1,400 checks to most taxpayers as part of President Biden’s $1.9-trillion relief package passed in March. With those direct payments, after-tax personal income jumped at a 67% annual rate in the first three months of the year.
“It’s off the charts,” said Joseph Brusuelas, chief economist at the accounting firm RSM US.
Spending on services had been relatively muted early this year. Now as more people get vaccinated and feel more comfortable traveling, eating out and visiting sports and entertainment venues, it’s not just spending on stuff but services that is expected to take off.
“We are at an inflection point,” Brusuelas said of the return in demand for services.
Economic growth could speed up even further if there’s additional fiscal spending. In the past, U.S. policymakers often relied on easy-money policies from the Federal Reserve to get out from recession, but this time there also has been an unprecedented amount of fiscal support — already well over $5 trillion, or about triple the total amount of federal measures responding to the Great Recession.
And Biden is proposing trillions more in spending and tax credits for infrastructure, research, clean energy and social, health and educational programs, many of them aimed at addressing gaping disparities in America.
Already the outpouring of federal dollars has sparked worries that inflation will spiral higher, push up interest rates and undermine the recovery.
Still, Mark Zandi of Moody’s Analytics said he’s never been more confident about the economy’s near-term prospects.
Real GDP and job gains will boom, he predicted, with unemployment falling quickly and lower-income households clearly feeling better in the next six to 12 months.
“It’s going to be rip-roaring,” he said.