The U.S. economy expanded at a rapid pace in the first three months of the year, setting the stage for what's expected to be the strongest annual growth in nearly four decades.
According to the Commerce Department, the economy grew at an annual rate of 6.4% between January and March as millions of Americans got vaccinated against COVID-19 and the federal government spent trillions of dollars to counteract the effects of the pandemic recession.
"The $1,400 paychecks that hit consumer mailboxes in March made a difference," said Nela Richardson, chief economist at the payroll processing company ADP.
Federal relief payments coincided with a nationwide vaccination campaign. More than 140 million Americans have so far received at least one shot.
"I think that's made a huge impact on confidence in the economy as things are starting to reopen and more people are inoculated against this disease," Richardson said.
The data comes a day after President Biden told Congress that "America is on the move again" as he touted his administration's work to end the coronavirus crisis.
Strong consumer spending in January and March helped to offset a February slump, when much of the country was hit with severe winter weather. In quarterly terms, the economy was 1.6% larger than in the final three month of 2020.
The expansion of the U.S. economy during the quarter is a marked contrast to the Eurozone, where vaccine rollout has been slower and restrictions on business more severe. Forecasters expect Europe to report an economic contraction for the first three months of the year.
"The course of the virus determines the course of the economy," said Diane Swonk, chief economist at Grant Thornton. "What we've seen in the Eurozone is really the mantra we've had to live with for the last year."
The U.S. economy shrank by 2.5% last year as a result of the pandemic, but forecasters expect a strong rebound this year — a turnaround Biden pointed to in his address to a joint session of Congress on Wednesday night.
"The International Monetary Fund is now estimating our economy will grow at a rate of more than 6% this year," Biden said. "That will be the fastest pace of economic growth in this country in nearly four decades. America is moving, moving forward."
Swonk at Grant Thornton said the economy could grow at its fastest rate since 1984.
The jump in demand is already straining factories and transportation networks and triggering shortages of lumber, steel and computer chips.
"The bottlenecks are everywhere," Swonk said.
The Federal Reserve expects somewhat higher inflation this year but insists it's not concerned that prices will spiral out of control.
"During this time of reopening we are likely to see some upward pressure on prices," Fed chairman Jerome Powell said Wednesday. "But those pressures are likely to be temporary."
The tourism and entertainment industries are hoping for a recovery during the spring and summer as pandemic restrictions are eased and more people feel comfortable doing things that were off-limits for much of the past year.
"You have a lot of people with some pretty robust savings, itching to get back to former pastimes like going to a movie or traveling," Richardson said. "Those hard-hit industries have the most to gain from the safe reopening of the U.S. economy."
While gross domestic product is expected to bounce back to its pre-pandemic level this spring, the labor market will take longer to recover. Of the 22 million jobs that were lost last year, employers have yet to restore more than 8.4 million.
What's more, million of people have dropped out of the workforce during the pandemic. Some are worried about returning to jobs so long as the virus is still spreading rapidly.
"Fear is a real factor here," Swonk said.
Other people are unable to work because they are busy caring for sick relatives or for children whose schools have yet to reopen.
"That makes it harder for working parents, particularly single moms," Swonk said.
As of mid-April, some 16.5 million Americans were receiving some form of unemployment assistance. More than 5.6 million of those were on extended benefits for people who have been out of work more than six months.
"That is concerning because the longer you're out of the workforce, the harder it is to get back in," Richardson said. "The scarring is there. And how long it will take to work off those scars is still a big question hanging over the labor market."
STEVE INSKEEP, HOST:
In his speech to Congress last night, President Biden cited a forecast that the economy may grow by more than 6% this year.
(SOUNDBITE OF ARCHIVED RECORDING)
PRESIDENT JOE BIDEN: That would be the fastest pace of economic growth in this country in nearly four decades. America's moving, moving forward, but we can't stop now.
INSKEEP: This morning, new federal numbers show the United States hitting that 6% pace, at least at the start of the year. The economy grew at an annual rate of 6.4% in the first three months of 2021. NPR's Scott Horsley joins us now. Scott, good morning.
SCOTT HORSLEY, BYLINE: Good morning, Steve.
INSKEEP: What's driving the growth?
HORSLEY: Consumer spending is the biggest driver. Of course, it's always a huge part of the U.S. economy. And a lot of spending was off-limits during the winter months when the pandemic was in full swing. Since then, in the last three months, the public health picture has improved, and that's leading to stronger economic growth. Diane Swonk, who's chief economist with the big accounting firm Grant Thornton in Chicago, sums it up as more shots and more shopping.
DIANE SWONK: The biggest shift has been the ramp-up in vaccinations and back-to-back emergency aid and stimulus packages.
HORSLEY: Those back-to-back relief payments put $2,000 in most people's pockets. And at the same time, more than 140 million Americans have now received at least one shot against the coronavirus, so they're feeling more comfortable going out and spending money.
INSKEEP: So what's the outlook as we try to finish the year at that 6% rate, if possible?
HORSLEY: It's pretty good. We could see even stronger growth in the spring and summer. New infections have started to fall in the last week or so. And you're seeing restrictions on restaurants and other businesses being eased. People have also saved a lot of money when they couldn't travel or eat out as much. So we expect to see a rebound in tourism and entertainment spending during the summer. Sometime this spring, GDP could actually get back to where it was before the pandemic.
There are some challenges, though. The strong rebound in consumer demand is stretching factories and delivery networks. And so we're seeing all kinds of shortages from steel to lumber to computer chips. We could see similar shortages on the services side if people start flocking to restaurants or hotels before they're fully staffed up for business. Forecasters do think those bottlenecks will eventually work themselves out, but it could take a little while.
INSKEEP: Well, if there's going to be bottlenecks in some places and shortages of workers in some places, does that mean the employment picture is improving?
HORSLEY: The job market is improving, but it's got a longer way to go. You know, employers added more than 900,000 jobs in March. April's figure, which we'll get next week, could be even better. But we need another eight or nine months like that to make up for all the jobs that were lost last year. And that weakness in the employment sector is one reason the Federal Reserve is continuing to offer very strong support for the economy, with interest rates near zero, for example. Fed Chairman Jerome Powell told reporters yesterday, even though the economy is improving, it's not yet recovered from the coronavirus recession.
(SOUNDBITE OF ARCHIVED RECORDING)
JEROME POWELL: The economy is a long way from our goals, and it is likely to take some time for substantial further progress to be achieved.
HORSLEY: Just this morning, Steve, the Labor Department reported another drop in weekly unemployment claims. That's a good sign because it means fewer people are being laid off. Those claims are still really high by historical standards, though. And as of mid-April, there were 16 1/2 million people receiving some form of unemployment aid. And that includes more than 5 1/2 million on emergency programs for folks who've been out of work more than six months.
INSKEEP: Really good reminder, Scott - people still out of work, people who owe back rent, back mortgage payments, a lot of different things - really appreciate it.
HORSLEY: You bet.
INSKEEP: That's NPR's Scott Horsley. Transcript provided by NPR, Copyright NPR.