It’s Official – 1Q21 GDP is 6.4%
/The first quarter of 2021’s Real Gross Domestic Product (GDP) rose 6.4% per the June 24, 2021 release from the U.S. Bureau of Economic Analysis (BEA). We say official because it comes out three times with the third time being the final number. This is much higher than the 2%-3% the Fed considers ideal. According to First Trust’s Chief Economist, Brian Wesbury, these are the factors that support the number:
The 6.4% GDP growth was largely due to the rollout of the vaccines, fewer restrictions on business activity, and massive government stimulus.
Small upward revisions to business fixed investment, inventories, and personal consumption were offset by downward revisions to net exports.
Consumer spending was the biggest driver of growth in first quarter, with spending on durable goods rising at a 49.2% annual rate, and purchases of motor vehicles and parts up at a 65.1% rate, in spite of supply-chain issues like a lack of semiconductors holding back supply.
Food services and accommodations rose at a 26.4% annual rate after slowing in fourth quarter, signaling that virus fears began dissipating as the vaccine became available early this year. Expect service consumption to continue to pick up rapidly in the quarters ahead.
Businesses ramped up investment in equipment and intellectual property products (think software), which rose at annual rates of 15.0% and 15.3%, respectively, and which should help spur future growth in productivity.
The largest drags on real GDP growth in first quarter remained inventories and net exports. Inventories fell as businesses with supply-chain issues met increased demand by lightening up the goods on their shelves and in their showrooms. In turn, this leaves more room for future growth as companies strive to replenish inventories in the year ahead.
Net exports mostly fell because of a surge in imports as the US economy recovers more quickly than many of our advanced-economy trading partners.
Today we also got a revised look at economy-wide first quarter corporate profits, which hit a record high, now showing an increase of 2.4% from the fourth quarter and up 15.5% from a year ago. Profits were led by gains at domestic non-financial corporations, which were revised up 4.3% versus the reading a month ago.
Our capitalized profits model suggests US equities remain cheap, not only at today's interest rates but even using a 10-year Treasury yield of 2.0%. Notably, corporate profits have already made a V-shaped recovery from the plunge last year as the pandemic was first erupting in the US.
With COVID data continuing to improve, widespread access to a vaccine, and consumers flush with purchasing power, in part due to government stimulus money, expect profits to keep growing and hitting new record highs.
