US economy 'on fire' fueled by government relief

The vigor of the rebounding U.S. economy has been particularly striking in the first quarter given the scope of damage the coronavirus pandemic inflicted on it beginning in March of last year, AP reports.

With businesses all but shut down, the economy contracted at a record annual pace of 31 percent in the April-June quarter of last year before rebounding sharply in the subsequent months.

“The economy is on fire,” Sung Won Sohn, a finance and economics professor at Loyola Marymount University, said before Thursday’s GDP report was released. “It is being fueled by the vaccine, which is the best economic stimulus we have, plus massive government spending.”

Thursday’s GDP report showed that consumer spending, which accounts for more than two-thirds of the economy, surged at a 10.7 percent annual rate in the January-March quarter, a significant acceleration after spending had slowed to a 2.3 percent annual gain in the final three months of 2020.

Business investment greew at a strong rate of nearly 10 percent, reflecting a burst of spending on equipment.

The residential sector, a standout performer in the last year thanks to ultra-low mortgage rates, grew at a roughly 11 percent annual rate in the first quarter, still solid but down from the fourth quarter. Government spending grew at a 6.3 percent annual rate after two straight declines that had reflected weakness at the state and local level as the recession shrank tax revenue.

Businesses did slow their pace of inventory restocking in the January-March quarter, which shaved 2.6 percentage points from the quarter’s growth. And a rising trade deficit diminished growth by 0.8 percentage point.

Mark Zandi, chief economist at Moody’s Analytics, said before Thursday’s GDP report was released that all signs point to an economic boom this year, fueled by heavy government support and a flood of pent-up consumer demand as the economy further reopens.

“This should be a gangbuster year,” Zandi said. “I have been forecasting the economy for almost 30 years, and I can’t remember a time when I have been as confident as I am today.”