The US economic recovery continues as the strong momentum is confirmed by the second GDP estimate. Consumer and government spending fuelled economic growth in Q1 2021.
The US Preliminary GDP was released yesterday, and it confirmed the strong momentum in the first quarter of the year. The real GDP estimate was unchanged, at +6.4% in the first quarter in annualized terms and +1.6% in simple terms.
Moreover, the outlook for the rest of the year is that the economy will grow at a pace of +7.7% on average, much better than expected only a few months ago. On the news, the stock market reacted strongly, with the Dow Jones index jumping a couple of hundred points shortly after the release.
What is interesting is that this is the second estimate, as the Preliminary GDP follows the Advance GDP and is followed by the Final GDP estimate. Therefore, the market participants usually have priced in the data already, so there is little or no reaction. Not this time, as the stock market clearly liked the confirmation that the US economy is on the right track.
Consumer Spending and Business Investment Surging
Key drivers of economic growth in the first quarter were government spending, business investment, residential investment and consumer spending. The latter, for instance, grew by 11.3%, business investment by 10.8%, and government spending by 5.8%.
The strong investment cycle is responsible for an increase in the US potential output as well. Fueled by a very encouraging vaccination campaign, the post-pandemic economic recovery is driven by increased business dynamism, lasting remote work, but also by faster technology adoption.
Businesses are starting to invest in huge numbers. The United States had been suffering from sluggish gross domestic business investment since the 80s. Not anymore.
Things are likely to improve even more. Yesterday, the US administration announced that the new budget for the fiscal year 2022 would reach $6 trillion. Moreover, the plan is for the yearly budget to keep rising, reaching $8.2 trillion by 2031.
As such, the risk is not that the US policymakers have not done enough during the pandemic, but that the measures may spur inflation and overheat the economy. To make sure none of the two is happening, the Federal Reserve and the US Treasury have a tough job in finding the right monetary and fiscal policy for the years ahead.