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Vaccines and Stimulus Spark Growth

RFP
Real GDP surged at a 6.4% pace in the first quarter, more than one percent faster than in the fourth quarter. Easy monetary policy, federal government spending to ramp up vaccinations and a surge in incomes enabled by emergency aid and two rounds of stimulus checks pushed consumer spending up at a double-digit pace. Spending on big-ticket items from appliances to vehicles jumped at a 23.6% pace during the quarter. Residential investment posted a third consecutive quarter of double-digit gains on the heels of rock-bottom mortgage rates and the desire to ease the stress of working from home.

Business investment continued to post solid gains but at a slower pace as firms scrambled to adopt existing technologies and upgrade their equipment. Gains in spending on information processing equipment remained particularly strong. This is an area that services as well as goods producers have embraced to boost productivity growth during the pandemic. It is this type of investment in technologies that could displace a portion of the jobs lost to the crisis. Think of the much more rapid adoption of self-checkout lanes we saw as consumers and big-box discounters rushed to create distance to reduce contagion during the height of infections.

Investment in new structures, which included commercial real estate, contracted for the sixth quarter in a row. It was one of the few sectors of the economy that was weak prior to the onset of the crisis in early 2020.

The largest, single drag on growth was inventories, which plummeted in response to the surge in consumer spending. That alone shaved 2.7% from overall GDP growth. Replenishment of those inventories will provide a tailwind for growth in the second and third quarters, which will easily eclipse growth in the first quarter. We will cross the precrisis peak in growth hit during the fourth quarter of 2019 in the second quarter of 2021. It will take longer for employment to reach its precrisis peak.

The trade deficit widened as exports dropped in response to lockdowns abroad. A slow ramping up of vaccinations and smaller fiscal stimulus pushed many of our European trading partners into double-dip recessions.

A surge in federal government spending overshadowed a modest rebound in spending at the state and local levels. Transfers to the states tied to the most recent round of fiscal stimulus started to show up in March and April. All of the boost provided by supplements to unemployment insurance and stimulus checks showed up in personal disposable incomes.

Unusually harsh winter weather and the power outages that accompanied it in the oil patch were also problems in February. The delays triggered by the Ever Given, the ship that got stuck in the Suez Canal, will take longer to recoup. Bottlenecks in the global supply chain are expected to ease as we pivot from spending on goods to services later this summer and fall. Those who can will be booking vacations instead of buying boats and the SUVs to tow them.

The biggest hurdles during the first quarter were regional outbreaks and the lingering surge in infections that accompanies them. The ability of the economy to fully heal is still contingent upon our ability to contain the spread of the virus now with vaccinations. Most are optimistic that warmer temperatures and the shift to outdoor venues will further suppress infections as we get further into spring and summer.

Many universities are requiring students to be vaccinated before returning to classes in the fall. Clinical trials are also progressing rapidly on vaccines for younger kids. That would help us get to the herd immunity needed to more effectively suppress the virus as we enter the fourth quarter. The concern is that vaccine hesitancy among many adults could prevent the kind of herd immunity needed to remain as open as we would all like to be for holiday parties in the winter.

Bottom Line
The economy is coming back. The first quarter will be the first of many robust quarters of growth. Federal Reserve Chairman Jay Powell made it clear that the Fed will not get in the way of those gains. Growth will easily be the strongest since 1984 this year. We will need it if we hope to heal from the worst crisis in several generations.

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