US economic rebound gains momentum in first quarter

US economic growth received a boost in the first three months of 2021 from massive fiscal stimulus that fuelled consumer spending, as well as looser lockdown restrictions, bringing output close to pre-pandemic levels.

Gross domestic product advanced 6.4 per cent on an annualised basis in the first quarter, the commerce department said on Thursday. That topped economists’ expectations for 6.1 per cent growth, according to a Refinitiv survey, and marked the quickest first-quarter growth since 1984.

Economic output advanced 1.6 per cent compared with the previous quarter, based on the measure used by other big economies. Real GDP was just 1 per cent shy of its pre-pandemic level.

Speaking to lawmakers on Wednesday night on the eve of his 100th day in office, Joe Biden hailed the country’s revival from the struggles of the pandemic, declaring America was “ready for take-off”.

“We are working again. Dreaming again. Discovering again. Leading the world again. We have shown each other and the world: there is no quit in America,” he said.

Despite the quick bounceback in the world’s largest economy, Biden made an extensive appeal for lawmakers to approve his sprawling spending agenda, which is designed to plough trillions of additional government funds into investments over the next decade to correct deficiencies in public goods.

Column chart of GDP change (% annualised) showing US growth regains momentum at start of 2021

After enacting a $1.9tn fiscal stimulus plan in March, Biden has turned his focus to winning support for a $2.3tn infrastructure spending bill he called a “blueprint for blue-collar America” and a $1.8tn expansion of the social safety net. “We can’t stop now — we’re in a competition with China and other countries to win the 21st century.”

Biden was heading to Georgia on Thursday afternoon to meet former president Jimmy Carter and hold an event to promote his economic packages, as he tries to increase public support for the legislation.

The president wants to pay for the next stages of his economic programme with higher taxes on corporations and the wealthy, which have triggered a backlash from Wall Street and corporate America, opposition from Republicans and even some wariness among fellow Democrats.

US economic growth has accelerated as more Americans are vaccinated against coronavirus and states and cities have begun to relax pandemic restrictions. The US has administered 234.6m doses, and 98m Americans are fully vaccinated — representing 29.5 per cent of the total population. 

Consumers spent lavishly on goods as the economy has reopened, drawing on stimulus cheques as well as their savings pile. Personal consumption expenditures grew at a 10.7 per cent annualised pace. However, Ian Lyngen, head of US rates strategy at BMO Capital Markets, noted that spending on services was little changed.

“This leaves open the possibility for a strong second quarter as reopening will stoke service sector consumption, although it also reiterates the concern that simply unlocking the doors and turning on the lights won’t be sufficient to get consumers re-engaged in in-person commerce,” he said.

Pressure eased briefly on longer-dated Treasuries after the GDP report, with the benchmark 10-year bond falling to 1.65 per cent. It later edged back up to 1.68 per cent. US stocks rose, with the S&P 500 closing nearly 0.7 per cent higher.

The Federal Reserve on Wednesday acknowledged progress in the economic recovery, but maintained that its future path would “depend significantly on the course of the virus”. Jay Powell, the Fed chair, said that while the “recovery has progressed more quickly than generally expected, it remains uneven and far from complete”.

Indeed, despite the improvement, the labour market is a long way from recovering all the jobs lost since the start of the pandemic. Powell on Wednesday noted that one month of stellar job growth was “not enough”.

“The Fed will clearly acknowledge this as an important factor with which to judge the overall recovery,” said Padhraic Garvey, global head of debt and rates strategy at ING. “But crucially, this is a different type of Fed, in the sense that their focus is on the most vulnerable Covid-impacted households, rather than the median one.”

A separate report from the labour department on Thursday showed that 553,000 Americans filed for new unemployment benefits last week, the lowest level since the start of the pandemic but still historically elevated. Nearly 16.6m Americans continue to seek jobless benefits more than a year since the pandemic began.

The Fed, which signalled that it was in no rush to remove its ultra-easy monetary policy, has projected 6.5 per cent GDP growth and an unemployment rate of 4.5 per cent this year. Growth is expected to moderate to 3.3 per cent in 2022.

Despite the strong GDP report, Patrick Leary, chief market strategist and senior trader at Incapital, raised concerns about the economy’s growth trajectory once the effects of the most recent Covid stimulus relief package ebbs.

“I question how much the economy can grow without the help of stimulus, but perhaps that doesn’t matter near-term as the administration is planning another round of spending to stimulate the economy.”

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