May 3, 2021 — Strong GDP Growth in the First Quarter


US GDP grew at a 6.4 percent seasonally adjusted rate in Q1, the Commerce Department said last week.  The figure is within 1 percentage point of its peak, achieved in late 2019, just before the coronavirus took hold.   Households, with billions of dollars of stimulus monies in hand, drove the output by spending more for big-ticket items like cars and furniture.  Just a year ago, the US economy contracted at an annual rate of -31.4 percent in Q1 and the unemployment rate stood at 14.8 percent, a post WW2 high.  For all of 2020, the economy contracted 2.4 percent.  Economists expect the economy to pick up more in the second half of the year, with growth projections averaging between 6-7 percent.

The Fed addressed the recent pick-up in inflation at their monthly meeting last week; they expect the increase to be temporary.  They expect inflation to exceed their 2% target this year, but then it will fall off in 2022.  The economy has advanced faster than the Fed expected, but the attribute the rise in inflation due to transitory factors. They will hold rates steady until the employment situation rises toward full employment and inflation averages 2% before resuming bond purchases. The Fed is willing to risk a bit of overheating rather than put the brakes on a recovery.