US recovery gains steam as spending fuels 6.4% GDP growth

[WASHINGTON] US economic growth accelerated in the first quarter as a rush of consumer spending helped bring total output to the cusp of its pre-pandemic level.

Gross domestic product expanded at a 6.4 per cent annualised rate following a softer 4.3 per cent pace in the fourth quarter, the Commerce Department's preliminary estimate showed on Thursday. Personal consumption, the biggest part of the economy, surged an annualised 10.7 per cent, the second-fastest since the 1960s.

The inflation-adjusted value of domestically produced goods and services climbed to an annualised US$19.09 trillion, indicating GDP will soon eclipse the pre-pandemic peak of nearly US$19.3 trillion.

Rising vaccinations, faster job growth and two rounds of federal stimulus payments combined to supercharge household spending. As government restrictions on activity are widely lifted, consumer demand is seen broadening and driving outlays for long-downtrodden services such as travel and leisure.

A host of high-frequency data, including restaurant and air travel bookings, already confirms a rapidly improving economy that has helped drive stock prices to fresh highs.

The pent-up demand that's seen driving outsize growth this year is propelling prices skyward at the same time producers are experiencing material shortages and supply-chain challenges. Further, the Biden administration and the Federal Reserve are pushing ahead with policy prescriptions that provide even more juice for the economy.

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The median forecast in a Bloomberg survey of economists called for 6.7 per cent growth in the January through March period.

The pickup in growth in the January to March period also reflected continued strength in business investment and housing. Non-residential investment rose an annualised 9.9 per cent, driven by equipment and intellectual property, while residential investment increased at a 10.8 per cent rate.

Firm household and business spending has left inventories lean and spurred import demand - two areas that weighed on first-quarter growth. Net exports of goods and services subtracted 0.87 percentage point from GDP, while the change in inventories subtracted 2.64 points.

Excluding the trade and inventories components of GDP, final sales to private domestic purchasers, a gauge of underlying demand, accelerated to a 10.6 per cent pace.

US growth forecasts have been upgraded over the past few months after the US$1.9 trillion pandemic relief Bill that passed through Congress along party lines proved to be larger than many economists originally expected.

In addition, President Joe Biden has now proposed two additional spending plans - one focused on infrastructure and the other on families - that would infuse trillions more dollars into the economy over the next decade.

Meanwhile, Fed officials are sticking with their ultra-easy monetary policy to ensure businesses have access to capital and consumers can borrow cheaply for big-ticket items such as homes and cars.

"We were in a deep, deep hole a year ago and now with a lot of help from fiscal policy, some additional help from monetary policy, and a great deal of help from vaccination, we're seeing a strong rebound in activity," Fed Chair Jerome Powell said during a press conference Wednesday after the central bank's policy meeting.

While acknowledging the economy's progress, the Fed kept its key interest rate near zero and maintained its US$120 billion monthly pace of bond purchases. In their statement, policy makers said that while inflation has picked up, it mostly reflected "transitory factors." The GDP report showed the personal consumption expenditures price index excluding food and energy costs climbed an annualized 2.3 per cent in the first quarter after a 1.3 per cent pace in the previous three months.

BLOOMBERG