First-quarter GDP: Growth improves as the recovery accelerates

An improved public health outlook linked to mass vaccinations and a flood of fiscal aid coursing through the American economy boosted gross domestic product by 6.4% during the first three months of the year.

The composition of growth was rock solid to kick off the year as American households increased spending by 10.7%, setting the stage for the return of economic activity to pre-pandemic levels in the current quarter—an extraordinary policy achievement.

Net exports and gross private domestic investment each subtracted 0.87 percentage points from growth as changing inventories dragged down the top-line number by 2.64 percentage points. It is clear that as the recovery improves, firms release pent-up demand for investment and inventory accumulation rises, there is room for the economy to accelerate into the second quarter.

The primary policy takeaway from this report is to stay the course. It is essential that the fiscal and monetary authorities follow through on current policy paths for the economy to return to full employment, which we expect in the second half of next year.

Until then, providing vaccinations, fully reopening the economy this summer, opening schools this fall and finding consensus in Washington on the modernization of an aging American infrastructure all support what we think will be the strongest rate of growth since the 1980s.

The household-led spending increase was fueled by a range of gains—23.6% in demand for goods, 41.4% in advance outlays on durables, 14.4% on nondurables and 4.6% in service spending.

Given that the economy is not yet completely open, one can look at demand for services and get the sense that the increase in government cash transfers to households will stoke further acceleration in the services-dominant American economy during the middle of the year, which underscores our 10.7% forecast for the second quarter growth.

The alternative proxies for domestic growth look even stronger than the top-line number and imply that GDP in the current quarter should look even more robust. Real final sales advanced at a 9.2% clip, gross domestic purchases increased 7.1%, final sales to domestic purchasers jumped 9.8%, and final sales to domestic private purchasers increased 10.6%. Given the increase of 61.3% in disposable personal income, investors and firm managers should anticipate a sustained consumer-led boom through 2022.

The quality of the data inside the report was quite strong. Fixed business investment increased by 10.1%, nonresidential investment jumped by 9.9% and residential investment increased by 10.8%. Productivity-enhancing investment in equipment increased by 16.7% and intellectual property by 10.1%. Government consumption increased by 6.3% on the back of a 13.95% increase in federal consumption and contributed 1.12 percentage points to overall growth.

The only real blemish in the report was the 4.8% decline in structures that underscored the 5% decline in overall gross private investment during the quarter.

As expected, net exports were a drag on growth, with imports subtracting 0.77 percentage points from growth and exports 0.1 percentage points from the top line.