April 29, 2021
Housing reached its highest share of GDP since the bubble years.
The economy grew at a 6.4 percent annual rate in the first quarter driven by double-digit growth in consumption in both residential and nonresidential investment. The quarter’s growth left GDP just 0.9 percent below the pre-pandemic level reported for the fourth quarter of 2019.
Productivity Growth Looks Strong
The strong growth in the quarter also implies that the pick-up in productivity growth seen in 2020 is continuing. After growing at just a 1.0 percent annual rate for the prior decade, productivity increased by 2.5 percent from the fourth quarter of 2019 to the fourth quarter of 2020.
With hours having risen at roughly a 2.5 percent annual rate in the first quarter, today’s GDP figure implies productivity growth of close to 4.0 percent. Productivity data are notoriously erratic, and surely even more so than usual given the shutdowns and reopenings associated with the pandemic, but these data are encouraging. If productivity can remain on a faster growth path, then there will be far less basis for any concerns with inflation.
Durable Goods Consumption Continues to Soar in First Quarter
Consumption of durable goods rose at a 41.4 percent annual rate in the quarter and now stands 21.7 percent above its pre-pandemic level. This jump accounted for 2.95 percentage points of the growth in the quarter. Sales of cars and trucks rose at a 51.5 percent annual rate and are now 25.2 percent above the pre-pandemic level.
Sales of household furniture also rose sharply, reflecting the surge in home buying. Sales are now 19.6 percent above the pre-pandemic level. Purchases of recreational goods and vehicles also rose sharply and stands 29.4 percent above its pre-pandemic level. This category includes both entertainment items, such as televisions, as well as goods that would be purchased for home offices, such as computers and printers.
Nonresidential Investment Continues to Rise Rapidly
Investment in equipment and intellectual products rose at a 16.7 percent and 10.1 percent annual rate in the first quarter, respectively. Investment in equipment is now 7.5 percent above its pre-pandemic level, while investment in intellectual products is 4.6 percent higher. This is encouraging, since high levels of investment can sustain stronger productivity growth.
Investment in nonresident structures continues to lag; it declined at a 4.8 percent annual rate and is now 17.1 percent below its pre-pandemic level. This reflects the declining need for office space, as well as traditional retail space.
Housing Continues to Soar
Residential construction increased at a 10.8 percent annual rate. It is now 17.3 percent above its pre-pandemic level, pushing the housing share of GDP to 4.7 percent, its highest level since the bubble.
There is still little basis for a concern that a collapse in house prices will again crash the economy. The first quarter construction levels are still a full 2.0 percentage points below the peaks hit in the bubble. Also, there is good evidence that this surge is being driven by the fundamentals of the market as people are shifting their consumption to spend more on housing. The savings rate has been hitting record highs through the pandemic, as opposed to the record lows seen in the housing bubble years.
State and Local Government Spending and Services Continue to be Drags on the Economy
State and local government spending rose at a 1.7 percent annual rate, leaving it 1.9 percent below the pre-pandemic level. This reflects the need to make cutbacks due to revenue shortfalls, as well as the fact that many schools were closed to in-class instruction in the quarter. With the recovery act spending coming through at the end of the quarter, and most students now back in class, we will likely see strong growth in the second quarter.
Consumption of services rose at a 4.6 percent annual rate in the quarter but still stands 5.7 percent below the pre-pandemic level. This reflects the high levels of infection at the start of the quarter that prevented people from going to restaurants or seeing their doctor for nonessential care. With the progress in controlling the pandemic, we are certain to see a big jump in the current quarter.
Trade Deficit Rises Sharply in Quarter
The nominal trade deficit rose by more than 5.0 percent in the quarter to $847 billion, as imports rose 5.7 percent, while exports edged down 1.1 percent. In other times we may view a rising deficit as a drag on growth. In this recovery the trade deficit will be a major release valve for any inflationary pressures the economy develops over the course of the next couple of years.
The Future Looks Bright
The overall picture in this report is overwhelmingly positive. The growth in the quarter was strong, as expected. The sectors where recovery has been trailing, consumption of service and state and local government spending, seem likely to boom in the current quarter, pushing the economy well above its pre-pandemic level.
Furthermore, the continuation of strong productivity growth in the quarter seems likely to alleviate any inflationary pressures. Also, the trade deficit is expanding along with the economy, indicating that imports are acting as a relief valve.