April 27, 2021
While we should see strong growth, almost certainly over 7.0 percent, it will be setting the stage for even more rapid growth in the second quarter.
While many pandemic restrictions were in place for much of the quarter, they were being weakened in most states by March. Furthermore, with large numbers of people having received vaccines by the end of the quarter, people were more willing to go to stores, restaurants, and other business. In addition, most people had received both their $600 pandemic checks from the December rescue package and their $1,400 check from the Biden package by the end of the quarter.
Still, the pandemic was seriously weighing down the economy for January and February, even as it improved rapidly in March. This means that, while we should see strong growth, almost certainly over 7.0 percent, it will be setting the stage for even more rapid growth in the second quarter.
The first point to note in this report is that the implied productivity growth will be very strong. Productivity growth was 2.5 percent from the fourth quarter of 2019 to the fourth quarter of 2020. That’s 1.5 percentage points faster than the average over the prior decade. Hours grew at roughly a 2.5 percent annual rate, which implies an extraordinarily rapid pace of productivity in the quarter.
While the quarterly data are highly erratic, and the first quarter growth could very well be offset by some weak growth in later quarters, it is certainly consistent with a continuation of the rapid growth in 2019. This matters hugely, most immediately for the prospect of higher inflation and in the longer term for living standards.
If we can sustain a more rapid pace of productivity growth, businesses can absorb rising wages and other costs, without passing them on in higher prices. Also, over the long-term productivity growth determines how rapidly living standards can improve. It will be a huge deal if this more rapid pace of growth can be sustained for several years.
In this vein, it will be worth seeing the extent to which investment grows in the quarter. Nonresidential investment has held up relatively well through the pandemic. The fourth quarter level was only 1.4 percent lower than the year-ago level. Even this falloff was entirely due to weaker investment in structures. Investment in both intellectual products and equipment was already above its 2019 level.
This also feeds into the story of more rapid productivity growth. These components of investment will most directly feed into higher productivity.
Residential investment has also been very strong through the pandemic. This is fueled both by low interest rates and the increased opportunities for remote work. It is important to note, that unlike the construction boom in the housing bubble, this boom is driven by the fundamentals in the market.
The trade deficit is likely to rise a great deal in the first quarter. Measured as a share of GDP, it had risen by 1.2 percentage points from the fourth quarter of 2019 to the fourth quarter of 2020. The share for the trade deficit for the first quarter is likely to be the largest since the start of the Great Recession.
This is a story where the US economy is growing far more rapidly than the economies of our trading partners. As a result, our imports in the fourth quarter were almost back to their pre-pandemic level, while our exports were still down by almost 11.0 percent.
In other times we may view the rise in the trade deficit as a bad signal about US competitiveness, however that is not the case at present. With the economy getting a solid boost from the recovery package, the trade deficit provides a useful relief valve. Insofar as domestic producers are unable to meet demand, foreign producers will be stepping in to fill the gap. The trade deficit will also provide a welcome boost to growth for our allies in Europe, Japan, and elsewhere.
If the recovery package proves to be too large, it is far too early for any resulting inflation to be showing up in the data. We should see the core inflation rate coming in somewhat under 2.0 percent, with the overall rate somewhat higher due to sharp rises in energy prices in February and March. These increases, which we partly attributable to the weather that shut down refineries in February, were partially reversed in April, so will not be a factor going forward.
Gross Domestic Product, 1st Quarter 2021 (Advance Estimate) is scheduled for release by the Bureau of Economic Analysis on Thursday, April 29, 2021 at 8:30 AM Eastern Time.
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