Last Thursday, the Commerce Department said that the economy registered 6.4% GDP growth during the first quarter of 2021. This burst of growth almost put the US back to its pre-pandemic levels.
GDP Growth Went Up January to March
GDP or gross domestic product is the broadest measure of goods and services made in the country. For 1Q 2021, the GDP growth rate measured at 6.4% from January through March. The US narrowly missed by 1% its peak GDP growth rate of 7.4%, which happened in late 2019.
With many US households flush with stimulus money, Americans embarked on a spending spree throughout the first quarter.
With millions already armed with a COVID-19 vaccine, many Americans went ahead with many big-ticket purchases such as bikes, cars, and furniture. The federal government also boosted spending with its many aid programs for businesses affected by the pandemic.
Gregory Daco, the chief US economist at Oxford Economics, expressed surprise at the speed of US economic recovery. “If you had asked me a year ago where we would be today I certainly would not have said we would have recouped the pre-pandemic levels of economic activity.
Everything about this crisis has been unique. The speed and the magnitude of the contraction in economic activity were unprecedented. The amount of policy support put in place was extremely rapid,” he said.
Many retail outlets reported selling out their goods. The rush to buy items created a backlog of orders and parts for repairs. Suppliers can’t fill orders quickly enough, while dealers and repair centers experience delays while they wait for parts to arrive. In a way, life is returning back to normal.
The Economy A Year Ago
A year ago, GDP growth was nonexistent. The economy sharply contracted as output in the second quarter fell by a record 31.4%, With many shops and offices ordered shut down, the unemployment rate soared to 14.8% last April. Instead of GDP growth, the US economy contracted by 2.4% in 2020.
Fortunately, Congress gave a quick response by approving several stimulus measures that totaled around $5 trillion. At the same time, the Federal Reserve moved back interest rates to near-zero to prop spending and encourage borrowing.
This led to what the US is experiencing in 2021. Now, it's learning the recovery efforts worldwide. Now, the economy roared at 6.4% last quarter, and economists expect GDP growth to pick up further.
Now, the economy posted positive GDP growth rates for the last three fiscal quarters. Unemployment shrank from double digits to just 6% as more businesses reopened their doors.
Worker filings for jobless benefits have fallen to pandemic lows. With Americans receiving stimulus checks of $1,400 or more and nowhere to go due to travel restrictions, consumer spending on goods and services went on a rampage. Now, the supply of popular goods remains short and unable to keep up with demand.
Even as the economy started to heat up, the Federal Reserve maintained its decision to keep interest low. With ultra-low mortgage rates, Americans stopped shying away from buying houses.
According to the National Association of Realtors, purchases of pre-owned houses reached a 14-year high. Now, tight supply is slowing the market’s momentum.
Growth Carries Risks
Meanwhile, the US should remain wary of too much growth in too little time. Unchecked, it may lead to rising prices and inflation woes.
While the Fed noted the recent tick in inflation, they remained steadfast to low-interest rates. In particular, officials expect inflation to rise above the central bank’s goal of 2% this year. However, they also see inflation going down to target levels after.
In addition, businesses are now finding the need to raise wages, and by extension adjust its prices. Many workers left industries such as foodservice and retail sales to work in more pandemic-proof jobs. Owners had to sweeten the deal by offering higher starting pay.
Watch the Bloomberg Markets and Finance reporting that US jobless claims fall, GDP shows economic resurgence:
Do you think the GDP growth will continue until the end of the year? How can the government and businesses ensure a steady growth rate moving forward?
Let us know what you think. Share your comments below.