GDP gets a shot in the arm
Driven by stimulus and vaccines, the U.S. economy soared in the first quarter.
Economic growth rose in the first quarter by 6.4%, driven by a stronger pace of vaccine distribution, a broader reopening of states, a rapid rebound in the labor market and the march toward adult herd immunity by Memorial Day. That compares with 4.3% growth in the fourth quarter of 2020 and the outsized 33.4% surge in the third quarter (the single largest quarterly economic expansion since record-keeping began for this metric in 1947).
Consumer spending led the first-quarter charge with a 10.7% gain versus a 2.3% fourth-quarter increase. Consumers have rapidly shifted from cabin fever to jail break, with money burning a hole in our pockets, as the personal savings rate nearly doubled from February to 27.6% in March. In addition, business fixed investment rose in the first quarter, driven by gains in equipment and intellectual property. Housing increased for the third consecutive quarter, but the pace has declined sharply due to the lack of inventory on the market. Finally, nondefense government spending leapt at its highest rate since 1963, due to extremely generous fiscal-policy stimulus. On the negative side of the ledger, net trade subtracted from growth, and inventories declined.
The gross domestic product (GDP) flash of 6.4% was modestly weaker than the Bloomberg consensus at 6.7% and well below the Atlanta Fed’s “GDPNow” forecast at 7.9%. The Blue Chip consensus was at 5.4%, and our own forecast here at Federated Hermes was 6.3%.
We’re back! We continue to believe that the recession ended in May or June 2020, although the National Bureau of Economic Research will not officially date its end until later this year. On a chained-dollar basis, first-quarter GDP is now at $19.088 trillion, less than 1% below the fourth quarter of 2019’s $19.254 trillion, the last “normal” quarter before the economy collapsed due to the global pandemic. On a current-dollar basis, GDP in the first quarter hit $22.049 trillion, 1.4% above the fourth quarter of 2019’s $21.747 trillion.
Earnings recession is over We’re two-thirds of the way through the first-quarter reporting season, and S&P 500 results have been off the charts. Revenues have risen 11.8% year-over-year (y/y), with 76% of the companies beating consensus estimates by an average of 4%. Earnings were expected to rise by 23% y/y, but they’ve surged by 53% thus far, as 86% of the companies are beating consensus estimates by an average of 23%, just off the highest beat rate on record.
It's all about the jabs Why so strong? Operation Warp Speed produced four vaccines in a record nine-months’ time last year, which allowed us to start vaccinating our adult population last December. We were vaccinating 1.5 million people per day in January, a pace that we’ve since doubled, as the drug companies have ramped up their production rates. As we approach herd immunity, we’re normalizing economic activity, which is helping to generate much stronger growth. In the current second quarter, we are forecasting 8.3% growth and a 60% increase in corporate earnings.
Here are the details on the first-quarter GDP report:
Personal consumption rose a stronger-than-expected 10.7% in the first quarter (accounting for 7.02 percentage points of the gain in overall GDP), versus consensus expectations for a 10.5% increase. This compares with a 2.3% gain in the fourth quarter and an outsized of 41% increase in the third. In the second quarter of 2020, GDP plunged 33.2%, the steepest decline on record, as we shut down the U.S. economy to contain the virus and save lives. But the tremendous amount of fiscal stimulus injected into the economy in the last few months has helped retail sales to surge, boosting first-quarter personal consumption.
Corporate nonresidential capital spending rose 9.9% in the first quarter (adding 1.29 percentage points), versus gains of 13.1% in the fourth quarter and 22.9% in the third quarter, and a decline of 27.2% in the second quarter (its steepest drop since 1952). In the first quarter, structures declined for the sixth consecutive quarter, falling 4.8%. But equipment spending rose 16.7%, compared with gains of 25.4% in the fourth quarter and 68.2% in the third quarter. Intellectual property remained steady, rising 10.1% in the first quarter, compared with gains of 10.5% in the fourth quarter and 8.4% in the third quarter.
Housing leapt 10.8% in the first quarter (adding 0.49 percentage points). While the white-hot housing market has soared to a 15-year high, the pace of quarter-on-quarter improvement has slowed, as the inventory of available homes has thinned sharply. Fourth-quarter growth was 36.6%, which followed a robust 63% surge in the third quarter, its strongest since 1983, goosed by record-low interest rates and strong demand. That reversed the second-quarter decline of 35.6%, housing’s worst quarter since 1980.
Government spending rose 6.3% in the first quarter (adding 1.12 percentage points), compared with declines of 0.8% in the fourth and 4.8% in the third. But federal nondefense spending soared 44.8% in the first quarter (which added 1.07 percentage points) versus declines of 8.9% in the fourth and 18.3% in the third. Federal defense spending, on the other hand, declined 3.4% last quarter, versus fourth- and third-quarter gains of 4.8% and 3.2%, respectively. This “guns vs. butter” reallocation of federal resources last quarter reflects the aforementioned fiscal stimulus largesse. State and local spending rose 1.7% in the first quarter, reversing declines of 0.8% in the fourth quarter, 3.9% in the third and 5.4% in the second.
Inventories surprisingly declined by $85.5 billion in the first quarter (subtracting 2.64 percentage points), likely due to strong consumer demand but supply-chain bottlenecks that prevented companies from restocking. That compares with an inventory accumulation of $62.1 billion in the fourth quarter, a modest decline of $3.7 billion in the third and a sizable liquidation of $287 billion in the second. We fully expect restocking to resume in the current second quarter, which should boost GDP over the balance of 2021.
Net trade reduced GDP by 0.87 percentage points in the first quarter. Exports declined by 1.1% in the first quarter (subtracting 0.10 percentage points), compared with powerful increases of 22.3% in the fourth and 59.6% in the third. Import growth rose 5.7% in the first quarter (subtracting 0.77 percentage points), as the U.S. economy accelerated versus gains of 29.8% in the fourth and 93.1% in the third.
Private domestic final sales—which exclude volatile net trade, inventory building and government spending—jumped 10.6% in the first quarter versus gains of 5.6% in the fourth and 39% in the third. That compares with a decline of 32.4% in the second quarter of 2020 in the depth of the pandemic-driven recession. Because this metric is a much better indication of the economy’s underlying fundamental strength, it’s clear that the U.S. economy has already recovered from its worst recession in history. As a result, there’s no need for the additional $4 trillion of fiscal stimulus that President Biden has recently proposed, which would take the federal debt up to $33 trillion, resulting in a total debt-to-GDP ratio of approximately 165%.