U.S. Growth Pick Up Backstops Global Economic Recovery

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The world’s largest economy accelerated sharply during the opening quarter, boding well for both the U.S. growth outlook as well as the widely anticipated 2021 global recovery.

U.S. GDP growth rose from a quarter-on-quarter pace of 4.3% in the fading light of 2020 to 6.4% in the opening months of 2021, Bureau of Economic Analysis (BEA) data revealed on Thursday, which was only marginally below the 6.8% anticipated by economists.

Driving the increase were American consumers, aided by unprecedented financial support packages for households as well as city and state moves to ease coronavirus-related restrictions on activity, with personal consumption expenditures and federal government spending accordingly cited as top contributors.

Also featuring as drivers of the rebound were nonresidential fixed investment and residential fixed investment.

“Assuming that Covid variants remain contained, the second quarter is set for a further acceleration in growth as the re-openings continue,” says Katherine Judge, an economist at CIBC Capital Markets.

Within personal consumption expenditures durable goods saw the greatest increases in output, led by motor vehicles and parts although non-durable goods like food and beverages saw strong increases in demand alongside service providers in the food and accommodation trades.

Meanwhile, increases in government spending “primarily reflected an increase in payments made to banks for processing and administering the Paycheck Protection Program loan applications,” and public procurement of coronavirus vaccines.

Subtracting from the first-quarter U.S. recovery outcome were declines in exports, which are treated as an addition in the calculation of GDP, and increases in imports that are treated as a subtraction in the calculation of economic output.

Declining exports are a symptom of soft global demand that came in a quarter where many major European as well as rest-of-world economies were returned to ‘lockdown’ or otherwise saw restrictions on activity tightened in the face of rising infections and lacklustre progress on vaccinations.

But even as global demand for American goods and services softened, the GDP-eating increase imports into America will have acted as a stimulant for those weary economies elsewhere, which are widely expected to recover with increased gusto as the year goes on and with potentially virtuous implications for U.S. exports.

“For the EU, it seems the turning point is delayed into May for some countries, as vaccinations are slower than in the UK and the US. But restrictions should be lifted here during May as well,” says Mikael Olai Milhøj, chief analyst at Danske Bank.

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The U.S. economic recovery has been kickstarted since January by another landmark fiscal stimulus package worth $1.9 trillion and dubbed by Washington as the “American Rescue Plan,” all made possible as well as being supported in its effectiveness by Federal Reserve (Fed) monetary policy.

Fed officials made clear in their April monetary policy update on Wednesday that they won’t be tempted into winding down the bank’s $120Bn per month quantitative easing programme or lifting the Fed Funds rate range from near zero by “transitory” increases in inflation over the coming quarters.

They effectively threw down a gauntlet to investors this week who’d previously been attempting to call the bank’s bluff on pledges relating to its new average inflation targeting policy when guiding that “a string” of blockbuster non-farm payrolls reports need to be seen before policymakers are willing contenance even beginning a mere discussion about slowing the pace of U.S. government bond purchases, which rules out interest rate rises for likely a long time to come.

“Another round of stimulus checks and improving labour markets boosted household disposable incomes by another 13.7% (not annualized) in Q2, sending the household saving rate up to 21%. Households have ample purchasing power to boost spending as containment measures ease,” says Nathan Janzen, a senior economist at RBC Capital Markets.

The Fed is explicitly seeking to generate a larger dose of inflation than other central banks because it wants greater assurance that sufficient price growth will be sustained over the longer-term, which evidently requires a longer period of ultra accommodative monetary policy than is seen elsewhere.

This is supportive of not only the U.S. economy but also the global recovery too as it likely limits the extent to which American bond yields are able to rise, which in turn puts a supportive floor under bond markets in other parts of the world, helping to keep borrowing costs low and “financial conditions” accommodative for all including many of the world’s more vulnerable economies.