The US economy expanded at a 6.4% pace in the first quarter (figure below), the initial read on Q1 GDP showed.
That was slightly below consensus (6.7%), but not enough to alter anyone’s perception of the headline.
The range of estimates was wide. Six-dozen economists were looking for anywhere between 4.5% and 10%.
This effectively cements the recovery narrative. Most analysts expect “peak growth” to occur in the second quarter, when economic activity will benefit from vaccinations and a kind of “grand reopening” of the services sector just in time for summer. COVID fever was accompanied by cabin fever. With any luck, both will lift by Q3.
Personal consumption was strong, as expected, rising 10.7% in Q1 (figure below), a marked acceleration from Q4’s 2.3% pace. Consensus was looking for 10.5%.
The government flagged increases in durable goods (especially cars and parts), nondurable goods (notably food and beverages) and services (led by food services and accommodations).
Nonresidential fixed investment, which rose nearly 10% (figure below), reflected information processing equipment and IP products, namely software.
It was the third consecutive quarter of strong business spending. Final sales to private domestic purchasers jumped nearly 11% in Q1 following a 5.5% rise in Q4.
Not surprisingly, residential investment was robust. Q1’s 10.8% gain came hot the heels (and you can take “hot” figuratively and literally) of a 36.6% gain in Q4 and a 63% advance in Q3.
There’s no mystery there. With the possible exception of tech, there’s arguably no sector of the economy that’s benefited more from the pandemic than housing.
The price index jumped 4.1% in the first quarter following Q4’s 2% rise. Core PCE was up 2.3% QoQ. The former was an upside surprise. Consensus was looking for a much cooler 2.6% read. Core was soft, though. The market expected 2.4%.
The release noted that the increase in federal government spending “primarily reflected an increase in payments made to banks for processing and administering the Paycheck Protection Program loan applications as well as purchases of COVID-19 vaccines for distribution to the public.”
Digging a little deeper shows goods consumption was key. Durable goods rose more than 41% after falling -1.1% in the fourth quarter. Services spending, meanwhile, recorded a 4.6% gain, barely larger than Q4’s 4.3% advance.
“If there was any question where the stimulus checks went, this report provides meaningful context,” BMO’s US rates team remarked. “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 reengaged in in-person commerce.”
That latter bit is key. There’s still palpable concern among many Americans around the safety of restaurants and other high-contact businesses. Masks or no masks. Vaccines or no vaccines. The figure (below) shows leisure and hospitality making up ground. But it’s not enough.
I’ve insisted there can be no durable recovery (no pun intended) without the services sector. Simply put: That’s where the jobs are. Or, more aptly, that’s where the jobs were. And that’s where the slack is (figure above).
Of course, the current administration (much like the last administration, by the way) is attempting to resurrect manufacturing and make blue collars great again, only this time, with a tinge of green. We’ll see how it goes. But until then, we need the restaurants, bars, venues and, yes, even brick and mortar retailers, to start hiring again. We need foot traffic. And it’s coming, we’re told.
In any case, the first read on Q1 GDP is amenable to a straightforward assessment: There’s been progress. And it’s real progress, not just the kind of mechanical rebound we saw last year. But there’s work to be done. And thank God for that. After all, if the progress becomes too “substantial,” the benefactors with the printing presses might start whispering about raising the price of money.
