Relief checks drove consumer spending on goods in the first quarter. Pent-up demand for services may be the key going forward.
Consumers shook off the pandemic blues as 2021 began, putting stimulus checks to work buying cars and other goods and helping set the stage for what could be the fastest economic growth in decades.
The initial reading on the country’s first-quarter economic performance, delivered Thursday by the Commerce Department, showed that much remained far from normal. Even with a big jump in personal income, there was only a modest increase in spending on services like travel, dining and even health care.
But economists say that is already changing as more vaccinations are delivered and coronavirus-related business restrictions are eased. With better weather, savings accumulated during a long year of lockdowns, and an itch to make up for forced inactivity, Americans will have plenty of reasons to go out and spend.
“Consumers are now back in the driver’s seat when it comes to economic activity, and that’s the way we like it,” said Gregory Daco, chief U.S. economist at Oxford Economics. “A consumer that is feeling confident about the outlook will generally spend more freely.”
Over all, the broadest measure of the economy — gross domestic product — grew by 1.6 percent in the first three months of 2021, compared with 1.1 percent in the final quarter of last year. On an annualized basis, the first-quarter growth rate was 6.4 percent.
G.D.P. is nearly back to prepandemic levels.
2019 Q4 LEVEL
$20 trillion
+1.6%
FROM
PRIOR
QUARTER
15
10
Gross domestic product,
adjusted for inflation and
seasonality, at annual rates
5
’15
’16
’17
’18
’19
’20
’21
2019 Q4 LEVEL
$20 trillion
+1.6%
FROM
PRIOR
QUARTER
15
10
Gross domestic product, adjusted for inflation
and seasonality, at annual rates
5
’15
’16
’17
’18
’19
’20
’21
Total economic output should return to prepandemic levels by summer — in fact, Mr. Daco believes it has already done so. His firm estimates that the economy will expand by 3.1 percent in the second quarter, or about 13 percent on an annual basis. For the year, it expects growth of 7.5 percent, the best performance since 1951.
“This may be the tip of the iceberg,” Mr. Daco said. “I think we will see much stronger momentum into summer as health conditions continue to improve, policy support remains in place and employment strengthens.”
Helped by several rounds of government relief payments, households were sitting on a collective $4.1 trillion in savings in the first quarter, up from $1.2 trillion before the pandemic began.
That should find its way into the economy as services that were mostly off-limits come to life and customers flock to reopened establishments. Mr. Daco expects consumer spending to grow by more than 9 percent this year, a record.
G.D.P. is rebounding faster than it did in the Great Recession.
+15%
2001
1990
Cumulative percent change in
G.D.P. from the start of the
last five recessions
+10
1980
+5
2007
0
–5
2020
–10
Final quarter
before
recession
5 quarters
into recession
16
8
12
+15%
2001
1990
+10
Cumulative percent change in G.D.P.
from the start of the last five recessions
1980
+5
2007
0
–5
2020
–10
Final quarter
before
recession
5 quarters
into recession
8
12
16
The expansion last quarter was spurred by two batches of government payments to most Americans — $600 a person from a relief package enacted just before the end of 2020, and $1,400 more from legislation approved in March. That quickly translated into purchases of cars, furniture and household appliances, as well as clothes and food.
There was a similar jump in income last year after the first round of relief checks, which also caused a bounce in spending on goods.
“To some extent, when people have money, they’re going to spend it,” said Ben Herzon, executive director of IHS Markit, a forecasting firm. “If they’re not spending on services because they’re not going to movies or amusement parks, they’re going to derive utility from goods.”
He said he expected spending on goods to ease in the second quarter as services spending begins to rebound more strongly.
Spending on services is rebounding, but it is not growing as rapidly as spending on goods.
Percent change in
G.D.P. from the last
quarter of 2019,
by sector
+10%
Goods
+5
0
−5
Services
−10
−15
Q4
2019
Q1
2020
Q2
Q3
Q4
Q1
2021
Goods
+10%
Percent change in G.D.P. from
the last quarter of 2019, by sector
+5
0
Services
−5
−10
−15
Q4
2019
Q1
2020
Q2
Q3
Q4
Q1
2021
Consumer spending rose 2.6 percent in the first three months of the year, with a 5.4 percent increase in purchases of goods accounting for most of the growth. Spending on services, which has slumped throughout the pandemic, rose by 1.1 percent.
“This demonstrates the value of government intervention when the economy is on its knees from Covid,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But in the coming quarters, the economy will be much less dependent on stimulus as individuals use the savings they’ve accumulated during the pandemic.”
The economy’s underlying strength has been evident in the robust corporate earnings that many companies have been reporting in recent days. After the stock market closed Thursday, Amazon announced that its profit more than tripled last quarter to over $8 billion, while sales jumped 44 percent to $108.5 billion.
One striking aspect of the quarter’s economic activity was spending on motor vehicles and parts, which increased by almost 13 percent from the previous three months. Strong consumer demand and tight inventories drove prices higher.
Low interest rates, readily available credit, rising home values and stock prices, and strong trade-in values for used models are also easing the path for consumers.
At AutoNation, the country’s largest dealership chain, many vehicles are being sold near or at sticker price even before they arrive from the factory. “These vehicles are coming in and going right out,” said Mike Jackson, the chief executive.
Even if economic output is back to where it was before last year, as Mr. Daco estimates, it is short of where it would be without the pandemic. What’s more, economists say it is likely to take until sometime next year for employment to regain the ground it lost as a result of the pandemic.
The labor market underscores the uneven distribution of economic pain. White-collar employees have been able to make a smooth transition to working from home and relying on services like Netflix and DoorDash for their needs, but blue-collar workers and less-educated Americans have been hit hard. And while household savings over all have swelled, many families have seen their finances wiped out.
The unemployment rate for high school graduates was 6.7 percent in March, while it stands at 3.7 percent for Americans who hold a college degree. Members of minority groups have also suffered heavily, with the jobless rate for Black Americans at 9.6 percent, compared with 5.4 percent for whites.
Still, hiring does seem to be catching up. Last month, employers added 916,000 jobs and the unemployment rate fell to 6 percent, while initial claims for unemployment benefits have dropped sharply in recent weeks. On Thursday, the Labor Department reported that initial claims for state unemployment benefits had fallen to the lowest level of the pandemic for the third consecutive week.
Tom Gimbel, chief executive of LaSalle Network, a recruiting and staffing firm in Chicago, said: “It’s the best job market I’ve seen in 25 years. We have 50 percent more openings now than we did pre-Covid.”
Hiring is stronger for junior to midlevel positions, he said, with strong demand for professionals in accounting, financing, marketing and sales, among other areas. “Companies are building up their back-office support and supply chains,” he said. “I think we’re good for at least 18 months to two years.”
Ample savings and rising consumer optimism are giving businesses the confidence to bet on the future as well. Business investment rose 2.4 percent in the first quarter and surpassed its prepandemic level. Residential construction spending rose 2.6 percent.
Economic growth would have been even stronger had it not been for a fall in inventories, said Michael Gapen, chief U.S. economist at Barclays. Supply chain constraints and shortages of parts like semiconductors are causing halts in production, he said, most notably in the automobile sector.
That should ease in the months ahead, he added, especially as businesses take their cue from more bullish consumers.
“We’re at the opening stages of what could be a very strong six to nine months for the U.S. economy as it emerges from the pandemic,” he said. “The best is still yet to come.”
Ben Casselman, Neal E. Boudette and Sydney Ember contributed reporting.
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