Big Mo - May 3, 2021

The U.S. Bureau of Economic Analysis reported last week that U.S. Gross Domestic Product (GDP), which is the largest measure of the value of goods and services, expanded at a 6.4% annualized pace in Q1 vs 4.3% in the final three months of 2020.

Figure 1 highlights that GDP has nearly recovered to its pre-pandemic level. It’s just 0.86% below the Q4 2019 peak.

Consumer spending, which accounts for almost 70% of the economy, led the way with a 10.7% annualized increase. But spending by businesses on capital goods was also strong. Had it not been for a big drawdown in business inventories, growth would have hit 8%.

Credit fewer social distancing restrictions, the rollout of the vaccines, and a huge injection of cash into the economy from two stimulus bills passed in late December and March.

Figure 2 offers an excellent view of how the consumer has reacted to the ebb and flow of the pandemic, reopenings, and stimulus.

Last year, lockdowns in March and April dragged spending down. But early reopenings and the first round of checks from the CARES Act boosted activity in May and June.

Figure 2 also illustrates that new checks helped fuel another round of spending in January and March via $600 and $1,400 payments, respectively.

Yet, some of the cash is ending up in savings, at least for now. For most folks, March’s checks were more than double that of January’s, but spending was only slightly higher. Still, March was very strong, the third highest on record dating back to 1959.

Notably, the savings rate rose from an already high 13.9% in February to 27.6% in March, the second highest on record, back to 1959 (St. Louis Federal Reserve).

Stimulus bills are expensive. Cash comes from taxes, borrowing, and government printing presses—note that the Federal Reserve is buying $80 billion in Treasury bonds each month.

Are large government programs pulling spending forward and creating temporary demand? Maybe, but there is a pile of cash on the sidelines that seems set to fuel spending in the months to come.

And it may not just be consumer goods. The Conference Board’s April report on consumer confidence, which hit its best reading since February 2020, included this comment:

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