Strong start to US economy heralds stellar year

A strong start in the US economy heralds an outstanding year

The economy picked up pace in the final quarter, shaking off some of the lingering effects of the pandemic as consumer spending increased, aided by government stimulus measures and a relaxation of restrictions in many parts of the country. The Commerce Department reported Thursday that the economy grew 1.6 percent in the first three months of 2021, compared to 1.1 percent in the last quarter of last year.

However, economists say that is already changing as more vaccinations are given and business restrictions related to coronavirus are relaxed. With better weather, savings over a long year of lockdown, and the itch to make up for forced inactivity, Americans will have plenty of reasons to go out and spend money.

“Consumers are back in the driver’s seat when it comes to economic activity, and that’s how we like it,” said Gregory Daco, chief US economist at Oxford Economics. “A consumer who feels confident about the prospect will generally spend more freely.” Overall, the broadest measure of the economy – gross domestic product – grew 1.6 percent in the first three months of 2021, compared to 1.1 percent in the last quarter of the previous year. On an annual basis, the growth rate in the first quarter was 6.4 percent.

“It’s good news, but the better news is coming,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “There’s nothing in this report to lead me to believe that the economy won’t grow rapidly in the second and third quarters.” The expansion last quarter was driven by stimulus checks that quickly translated into purchases of durable goods such as automobiles and home appliances.

“This shows the value of government intervention when Covid’s economy is on its knees,” he added. “But in the quarters ahead, the economy will be much less dependent on incentives as individuals capitalize on the savings they accumulated during the pandemic.”

Consumer spending rose 2.6 percent in the first three months of the year, with a 5.4 percent increase in merchandise purchases accounting for most of the growth. Spending on services slumped during the pandemic rose 1.1 percent.

“This shows the value of government intervention when Covid’s economy is on its knees,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But in the quarters ahead, the economy will be much less dependent on incentives as individuals capitalize on the savings they accumulated during the pandemic.”

Without a decline in inventories, economic growth would have been even stronger, said Michael Gapen, chief US economist at Barclays. Supply chain constraints and bottlenecks in parts like semiconductors lead to production stops, especially in the automotive sector.

That should ease in the coming months, he added, especially as companies are targeting the more bullish consumers. “We are in the early stages of what could be a very strong six to nine month period for the US economy resulting from the pandemic,” he said. “The best is yet to come.”

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