Economy grew by 1.6% in first quarter, showing potential for boom

The GDP report, released by the Bureau of Economic Analysis on Thursday, showed that consumers are spending more on things such as cars and homes. A record boost in household after-tax income suggests there's more consumer spending power waiting in the wings.

The rosy economic news came the same day as news of the third straight week of reduction in jobless claims, according to the Labor Department. A range of companies across different sectors - including Caterpillar, Comcast, Mastercard, McDonald's and Microsoft - reported strong revenue in recent days.

"Virtually all key economic indicators are flashing a green light suggesting there's a lot of economic momentum for growth," said Bernard Baumohl, chief economist at the Economic Outlook Group. He likened the country's prospects to a bursting firework: spectacular while it lasts, with an afterglow that may linger for some time.

The recovery has been good for small businesses including Chesapeake Light Craft, which has seen surging sales of its flat-pack building kits for kayaks, 31-foot outrigger sailboats and more. The company is hiring new staffers for its 10,000-square-foot warehouse in Annapolis, Md., to handle a 20% increase in orders.

"Everyone I've talked to, they're just ready to get out," Chesapeake Light Craft CEO John Staub said. "They're ready for life to resume to normal."

Even when the economy reverses its pandemic losses, signs of trouble will linger. While the unemployment rate has fallen, about 8.4 million jobs lost during the pandemic have yet to return. The GDP report noted inflation is picking up: prices grew at a 3.5% annualized rate in the first quarter and are up 1.7% from a year earlier. Economists, including those at the Fed, expect prices to continue to pick up in the near term, reflecting ongoing supply-chain problems that are expected to ease as the global economy reopens.

The optimistic picture could make it more politically difficult for the Biden administration, which is making the case that the economy needs an ambitious $2 trillion infrastructure plan and an equally sweeping $1.8 trillion plan that directs money toward child care, education and paid family leave. Republicans in Congress oppose such large proposals and could point to the strengthening recovery and say there is not sufficient need, said Joe Brusuelas, chief economist at RSM.

"On infrastructure, maybe that's an easier case to make, because of the productivity lift that would follow," Brusuelas said. "I could make a very strong case for the social programs. But it becomes much more difficult when you're back to pre-pandemic levels of economic activity, and one can reasonably expect the economy will be back to full employment."

Harvard University economist Jason Furman, chair of the White House Council of Economic Advisers under President Barack Obama, said the data make a strong case that the novel coronavirus remains the biggest factor holding the economy back. People are spending in areas where it's safe to do so - buying goods such as boat kits or fire pits - but avoiding spending on face-to-face services such as restaurants and bars.

"It was an extraordinary quarter for people going out and buying stuff, particularly cars - I myself bought a car in Q1 - but the services part of the economy was still well below where it was before the pandemic," Furman said.

And customers have money to spend. Thursday's report showed that Americans received a record amount of after-tax income in the first three months of the year as the bulk of the $600 checks for the December stimulus and $1,400 American Rescue Plan checks were distributed. The record would not have been reached without more than $1.6 trillion in federal stimulus spending reaching household balance sheets since the crisis began, with $0.6 trillion of that coming in the past quarter, according to the BEA.

That includes stimulus measures that President Donald Trump signed in the final days of 2020, and the coronavirus relief package President Joe Biden signed in March. Economists say the first-quarter numbers will not reflect the full thrust of Biden's $1.9 trillion bill, which probably will charge the economy and year-long growth.

In Annapolis, Staub recently surveyed his employees about their willingness to reopen their small retail space to in-person traffic. Based on their input, he plans to open for retail and restart in-person boatbuilding classes in the very near future.

Customers flocked to the company when stay-home orders proliferated last spring and people were looking for socially distanced activities. Boatbuilding demand has not subsided, and Staub said 2021 is on track to at least match the record sales he saw in 2020. The company is shipping about 2,000 kits a year.

"I think there's going to be a ripple effect through the economy for a long time," Staub said. "The economy is just not the same as it was 12 to 16 months ago."

As people find that they have enough furniture and recreational vehicles, economists are watching for the service sector to spring back. If people start booking travel and dining out once again, jobs that vanished a year ago at hotels and restaurants may return.

Constance Hunter, chief economist at KPMG, said she'll be looking for complications of a strong rebound: supply constraints. Also telling will be the extent to which demand for services picks back up after peoples' quarantine spending fixated on goods.

Hunter noted auto sales - and an accompanying semiconductor chip shortage - as one example. In a tweet Thursday morning, Hunter said she did not expect that auto sales would keep growing at their roaring pace. But if people shift away from buying cars and spend more on services, that could ease pressure on demand for chips, giving supply chains time to recalibrate.

The aluminum trailers and specialty imported metal boat parts needed at Chesapeake Light Craft are often sold out months ahead of time. Nationally, demand for new homes has triggered a lumber shortage, sending prices soaring.

As Daryl Fairweather, chief economist at the national real estate brokerage Redfin, ticked off all the ways in which this housing market had set records - price growth, time on market, homes sold over list price, homes selling in less than a week - she said all that housing activity had an outsize effect on economic growth in the first three months of the year.

New construction, agent fees and remodels propelled residential real estate to its biggest share of the economy since the housing bubble of the mid-2000s, Fairweather said. Although those forces should remain strong through the summer, she expects that housing's role in the economy will recede as price growth slows and other sectors catch up.

As recently as early January, economists surveyed by Wolters Kluwer's Blue Chip Economic Indicators thought the first quarter would see 0.6% growth (2.3% annualized) as the pandemic peaked, but they raised their forecasts as stimulus money flooded the country and 94 million Americans were at least partly vaccinated in a three-month period, according to data compiled by The Washington Post.

The first quarter's growth, 1.6%, would be 6.4% at an annualized rate, but annualized rates can be misleading amid an unprecedented crisis because they imply that a quarter's trend will continue for an entire year. The Washington Post is focusing on quarterly rates until the economy recovers.

In the first half of 2020, as the United States shut down over fears of the fast-spreading novel coronavirus, the U.S. economy shrank more than 10%. After nine months of growth, it is more than nine-tenths of the way back. It remains further behind after accounting for population growth and the economy's estimated potential.

For much of corporate America, the boom is underway. Amid the rosy reports from firms including McDonald's and Northrop Grumman are ample signs companies believe that the boom will continue. Caterpillar's profits rose as the nation's mines and factors gear up for rising demand. Microsoft reported that the nation's coronavirus-era digital transformation continued apace.

If the current pace of economic growth is to be sustained, it will require increased productivity driven by new technologies such as those that proliferated during the pandemic, said the Economic Outlook Group's Baumohl. This week, Microsoft reported a 19% jump in revenue. On a call with analysts, CEO Satya Nadella noted the work-from-home world in which white-collar workers have been living played to the Seattle tech titan's strengths.

"Over a year into the pandemic, digital adoption curves aren't slowing down. In fact, they're accelerating and it's just the beginning," Nadella said.

Economists expect inflation to rise this year as vaccines become more widespread and people unleash pent-up desire to spend. But there's much debate about how high it will climb, and when the increase will trigger a response from the Federal Reserve or the White House.

On Wednesday, Fed Chair Jerome Powell warned that increases in inflation this year will be temporary and will reflect mismatches in supply and demand as the economy reopens. That's different from persistent or widespread price increases that weigh on the whole economy, he said.

"The supply will take a little bit of time to adapt," Powell said. "New restaurants will have to be opened. The supply of various inputs into the goods part of the economy will have to be brought back up to speed. And you're seeing some of that."