The government stimulus checks contributed significantly, putting the initial 2021 pace close to 2019 levels.

By Manuel Gutierrez, Consulting Economist to NKBA

GDP rose by 6.4% in the first quarter of 2021 to an annual rate of $19.1 trillion. The gains are not surprising, given the huge influx of stimulus funds from the government to counteract the negative effects of the pandemic. Government spending counts as one of the components that comprise the GDP.

The U.S. economy, as far as GDP spending is concerned, is clearly on its way to recovery. Total spending was growing at a fast pace prior to the pandemic and had reached a historical high of $19.3 trillion in the fourth quarter of 2019. Today’s spending, assisted by the 6.4% growth in the first quarter, is very close to the peak volume reached at the end of that year — in fact, it’s within 1%.

However, if the pandemic had not occurred and the economy had continued growing at the fourth quarter of 2019 rate of 2.4%, GDP today would be $750 billion larger than it is today. This is a rough estimate of the output lost due to the pandemic shutdown.

“Strong Q1 GDP growth of 6.4% puts it close to pace of 2019.”

Among the five major components of GDP, shown in Figure 2, Consumer Consumption leads with a 10.7% growth for the first quarter. Based on dollar value, consumer consumption of $13.3 trillion was over two-thirds of total GDP, or 70% in the first quarter.

Total government spending, at a growth rate of 6.3%, was the second highest contributor. Total imports are the last of the components with positive first-quarter growth, hitting  5.7%.

The final two components actually fell.  Exports were down 1.1% for the quarter, with that decline following two quarters of strong growth.

The last of the five sectors, Investment, fell by 5% to $3.5 trillion. While the major types of investment increased in the first quarter, as shown in Figure 3, the overall drop was caused by a 4.8% decline in business structures.

This aspect of investment, which represents the construction of most types of buildings, had begun to decline by the end of 2019, before the pandemic even began. The pandemic accelerated that decline, with the first quarter of 2021 marking the sixth consecutive quarterly drop in growth.

In contrast, the other areas of investment shown in Figure 3, such as (business) equipment and intellectual property, grew strongly in the quarter, helping offset the decline in Structures.

Residential investment, which includes new construction and remodeling of houses or apartment buildings, rose by 10.8% in the first quarter.

Although Consumption typically is more likely to make headlines, given its size relative to total GDP, investment is arguably more important for its role in the economy. Investment lays the seeds for the economy’s future growth, while consumption is key because it reflects the economic well-being of an economy’s population at a given point in time.

Since consumption comprises two-thirds of GDP, with $15 trillion in the first quarter, it’s interesting to see where consumers are spending those dollars. This is seen in Figure 4, which displays the major spending categories.

This is the only publicly available data that provides an insight as to how consumers spend their income. Even though monthly data on retail sales is published, this data reflects sales at Retail Stores, where consumers, businesses and even the government can shop.

Leading consumer consumption is spending for Housing & Utilities, which was $2.8 trillion in the first quarter. This category measures the continuous usage of a house, for instance, among other factors.

Second highest is spending for Health Care, which reached $2.5 trillion, or 17% of total consumption.

Although not shown in Figure 4, spending for service categories (like  hospitality or restaurants) is 14.4% lower this quarter than at the end of 2019. Recreation activities and Transportation, two areas most impacted by the pandemic, are down sharply from 2019. Recreation, which totaled $429 billion in the first quarter, is off by 27% from 2019. Transportation, with $380 billion in consumer spending, is 23% lower.

Although overall consumption is already nearly 2% higher than in 2019, services categories such as Transportation still have much ground to recoup to get back to earlier levels.

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