The U.S. economy boomed in the first three months of 2021, as states eased restrictions on businesses and vaccinations left consumers and businesses more confident.
Gross domestic product, a measure of goods and services produced in the U.S. economy, climbed 6.4 percent on an annualized basis in the January through March period. Outside of the third quarter of last year, it was the fastest growth for GDP since the third quarter of 2003.
The Biden Administration’s American Rescue Act was not passed until well into March, so it likely played little role in the expansion in the first quarter. Of the authorized spending, very little of the direct stimulus payments would have entered the economy in the first quarter. And economists suspect that only a fraction of those stimulus payments would have been spent in the first few weeks.
The Trump administration’s stimulus checks, sent out in December, probably did fuel some of the growth. But far more important was improved consumer and business optimism and the easing of restrictions that had repressed business activity.
Economists say that widespread vaccinations and declining viral cases, the reopening of more businesses, a huge infusion of federal aid, and healthy job gains should help sustain steady growth. For 2021 as a whole, they expect the economy to expand around 7 percent, which would mark the fastest calendar-year growth since 1984.
In March, U.S. employers added 916,000 jobs — the biggest burst of hiring since August. Meantime, retail spending has surged, manufacturing output is up and consumer confidence has reached its highest point since the pandemic began.
“We are seeing all the engines of the economy rev up,” said Gregory Daco, chief economist at Oxford Economics. “We have an improving health environment, fiscal stimulus remains abundant and we are starting to see rebounding employment.”
Personal consumption expenditures soared 10.7 percent in the first quarter, largely driven by a 23.6 percent increase in spending on goods. Spending on durable goods, which includes cars, trucks and appliances, rocketed 41.4 percent. Spending on services grew by 4.6 percent. Consumer spending accounts for 68.1 percent of GDP.
Spending on services appears to be expanding in recent months, suggesting economic growth has further accelerated.
Investment in equipment rose 16.7 percent, a sign of business enthusiasm and a forward indicator of economic expansion. Investment in intellectual property rose 10.1 percent. Investment in housing jumped 10.8 percent. Investment in commercial structures fell 4.8 percent, perhaps reflecting harsh weather and a decline in office construction.
The PCE price index—the Fed’s favored gauge of inflation—increased 3.5 percent, a big increase from the fourth quarter’s rate of 1.5 percent. Excluding food and energy prices, the so-called “core” PCE price index increased by a milder 2.3 percent, above the 1.3 percent recorded in the fourth quarter of 2020.
Imports, which diminish GDP, rose 5.7 percent, with imports of goods rising 6.5 percent and imports of services rising 6.7 percent. Exports, which add to GDP, fell 1.1 percent on global economic weakness.
Government spending rose 6.3 percent, including a 13.9 percent jump in federal government spending.
The speed of the rebounding economy has been particularly striking given the scope of damage the pandemic inflicted on it beginning in March of last year. With businesses all but shut down, the economy contracted at a record annual pace of 31% in the April-June quarter of last year before rebounding sharply in the subsequent months.
The renewed strength in the United States — the largest economy — is helping lead the developed world out of recession. In Europe, for instance, a recovery has lagged because of smaller government aid and slower vaccination rollouts that have prolonged lockdowns. Economists at Berenberg Bank estimate that the 19 countries that use the euro currency actually contracted in the first quarter.
For all the U.S. economy’s gains, it still has a long way to go. More than 8 million jobs remain lost to the pandemic. And the recovery remains sharply uneven: Most college-educated and white collar employees have been able to work from home over the past year. Many have even built up savings and expanded their wealth from rising home values and a record-setting stock market, which has rocketed more than 80% from March of last year.
Some economists say growth in the current April-June period could reach a 10% annual pace or more, driven by a surge in people traveling, shopping, dining out and otherwise resuming their spending habits.
The Federal Reserve’s ultra-low interest-rate policy, designed to encourage borrowing and spending, has provided a significant boost. Low mortgage rates have helped fuel a housing boom, creating jobs and raising demand for everything from appliances to cars to furniture.
In fact, the economy is expected to expand so fast that some economists have raised concerns that it could ignite inflation. In part, this is because rising demand has caused supply bottlenecks and shortages of some components, notably semiconductors, which are critical to the auto, technology, and medical device industries, among others.
It remains to be seen whether the Biden administration’s $1.9 trillion “rescue” package will have a big impact on the economy. Supporters say it will further accelerate the rebound. But some critics— including some prominent liberal economists like Larry Summers—fear that the additional spending, funded mostly through borrowing, could push up inflation too high. Alternatively, consumers could react to the skyrocketing price tag of government programs and escalating debt by pre-emptively pulling back their own spending in anticipation of having to pay higher taxes later. Biden is already proposing to raise taxes on wealthier households and to jack up the corporate tax rates, which would likely lower investment income for U.S. households.
On top of the short-term rescue bill, Biden is proposing two additional huge spending plans: a $2.3 trillion infrastructure package and a $1.8 trillion investment in children, families and education that the president promoted Wednesday night in his first address to a joint session of Congress. These entail major transformations of the U.S. economy, including an expensive shift from fossil fuels and an enlarged role for government in how families finance the upbringing of their children from birth through college.
At a news conference Wednesday, Fed Chair Jerome Powell reiterated his confidence that any jump in inflation would prove temporary. And he said the Fed wants to see a substantial and sustained recovery before it would consider withdrawing its economic support. In the meantime, Powell made clear, the central bank isn’t even close to beginning a pullback in its ultra-low rate policies.
—The Associated Press contributed to this report.