The initial estimate for first quarter GDP came in at 6.4%, falling short of consensus expectations for a 6.7% increase to start the year. While a moderate disappointment, U.S. economic growth surged in the first three months of 2021, as businesses and consumers are continuing to recover from the COVID-19 recession.
That headline number would have been stronger if not for a sizable drawdown in business inventories, as production fell short of demand. That factor alone shaved more than 2.5 percentage points off top-line growth. Inventory build had contributed positively over the latter half of 2020, but the drawdown should bode well for coming quarters if demand growth is sustained as anticipated.
Underlying an overall positive result is a tale of two economies: a goods economy that’s throttling up and a service sector that’s still pushing through the headwinds of social distancing and restrictions on its capacity to deliver to consumers.
Unsurprisingly, consumers led the way in the rebound, as personal consumption rose by a robust 10.7%, well above the tepid 2.3% in the final three months of 2020.
Despite the sharp increase in consumption, the impact of social distancing and ongoing restrictions are still readily apparent in how consumers are spending, which remains heavily tilted toward goods over services. Overall spending on goods rose by 23.6%, reflecting strong spending across the board but particularly in durable goods, which posted a 41.4% gain.
Contrast that with spending on services, which rose by a comparatively modest 4.6%. Conditions are improving for the service sector, but the recovery has been much slower to gain steam.
Similar to the bifurcated story between goods and services, private investment reflects the changing nature of the economy, particularly in the demand for real estate.
The growing consumer spending appetite has extended to the housing market in the first three months of 2021, gaining nearly 11% after a strong showing in the latter half of last year. Low interest rates, more time spent at home, and a migration out of urban and into suburban areas all appear to be driving demand for single-family homes. Existing home sales have surpassed pre-recession levels, and new construction has picked up considerably. Both are likely to slow to a degree, as the inventory of available homes is exceptionally low, and a lack of skilled trades workers may limit construction.
Contrasting the strong demand for housing is a continued softening in commercial construction, which declined for the sixth consecutive quarter. This is likely to be an area of the economy in which the effects of the pandemic may be felt for some time to come. The collapse of both business and personal travel, the seismic shift from in-office routines to work from home, and surging online spending have cast a long shadow over the hospitality, office, and retail real estate sectors. The result was a 4.8% dip in recent months. In lieu of spending on structures, businesses tilted their capital expenditure budgets toward equipment, which posted a third consecutive strong quarter, gaining nearly 17%.
Government spending also provided a lift, with the bulk of the 6.3% gain attributable to an outsized increase in nondefense spending by the federal government.
Looking ahead, the economy should continue to gain momentum in the coming months, as a greater portion of the latest round of stimulus checks are spent, continued progress in vaccinations should lead to a reduction in health risk, restrictions are gradually lifted, and the transition to a more mobile day-to-day lifestyle for many Americans provides a boost.
The biggest question that lies ahead surrounds the risk of inflation, which is poised to accelerate as demand picks up and supply for many goods and services remain constrained. There are still bottlenecks in the economy that will normalize over time but could create at least short-term upward pressure on prices that could be greater than we’ve seen in many years.
The bottom line? The seeds of a virtuous cycle have clearly sprouted, but still have plenty of room for growth in the coming quarters. Consumers are flush with cash, and COVID-19 fatigue has put them in the mood to spend. We expect that they will.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.