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Economic Report: The resurgent U.S. economy grew 6.4% in first quarter and even faster growth lies ahead

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The numbers: The U.S. economy charged ahead in the first three months of the year thanks to more Americans getting vaccinated, fewer people catching the coronavirus and Washington approving another gargantuan $1.9 trillion stimulus.

Gross domestic product, the official scorecard for the U.S. economy, rose at a 6.4% annual pace in the first quarter, the government said Thursday. Growth would have even stronger if supply bottlenecks and shortages of key materials didn’t curb production.

Economists predict even faster growth in the months ahead if the bottlenecks ease, coronavirus cases keep falling and most government restrictions fall by the wayside.

Economists polled by Dow Jones and The Wall Street Journal had forecast a 6.5% increase in GDP on an annualized basis. The U.S expanded at a more modest 4.3% pace at the end of last year, when a record rise in coronavirus cases stunted growth again.

Read: Fed sticks to easy-money strategy even as it sees strengthening economy

What happened: Consumer spending surged 10.7% early in the new year, helped by a combined $2,000 in stimulus checks that the government sent to most Americans in January and March.

More generous unemployment benefits and the creation of 1.5 million new jobs also spurred higher spending. Americans spent more on autos, home furnishings, recreational goods, clothing and takeout food, among other things.

The private sector also ramped up spending, especially on new equipment and software. Business investment jumped 10%.

Read: Durable-goods orders rebound, but chip shortages gum up the works

Investment in housing was also strong, up nearly 11%, as builders raced to erect more homes amid a surge in sales. Ultra-low mortgages rates have spawned an unlikely housing boom during the worst pandemic in 100 years.

Yet the value of stockpiled goods, or inventories, declined by a whopping $147.5 billion in the first quarter because companies could not keep up with demand. GDP would have risen 9% if the level of inventories had been unchanged.

Higher prices for an array of goods ranging from precious metals to lumber and a shortage of key parts such as computer chips hampered the ability of firms to maintain accelerated rates of production. These problems are contributing to higher inflation.

The good news is, production is likely to pick up in the second quarter as bottlenecks clear up and more supplies become available, though problems could linger into next year, some economists warn.

Another drag on the economy: record international trade deficits. U.S. imports climbed 5.7% in the first quarter while exports declined 1.1%..

There’s a silver lining, though. The speedier recovery of the U.S. economy along with generous government aid has enabled Americans to spend more on imports as well as domestically produced goods and services.

Economists predict U.S. exports will recover once the economies of other major trading partners in Europe and Asia catch up, eventually reducing deficits to still-high but more manageable levels.

Government spending, not surprisingly, also surged. The federal government led the way, but states and localities also spent more as schools began to reopen.

The pace of inflation, meanwhile, rose at a 3.5% annual clip in the first quarter. Inflation is rising again as the economy strengthens, but the Federal Reserve argues any increase is temporary and mostly reflects the economy returning to normal.

Once all the pentup demand is met, the Fed predicts, inflation will subside again to a 2% rate or less.

The big picture: The economy was bound to speed up again once the vaccinations did their job and coronavirus cases fell. About 43% of the population — and 55% of all adults — have received at least one coronavirus shot.

Low interest rates and government stimulus on a unprecedented scale have also push the economy into overdrive. Much of the stimulus has yet to be spent, what’s more, and the Biden administration is aiming to spend even more money.

Assuming the virus stays contained, the economy should grow quite rapidly through the rest of the year, especially if companies hire or rehire the millions of people who are still out of work because of the pandemic.

Read: U.S. jobless benefit claims sink to new pandemic low of 553,000

GDP is forecast to grow 8.2% in the second quarter on an annualized basis.

What they are saying? “With economic activity above pre-pandemic levels, the recession is clearly over,” said chief economist Chris Low of FHN Financial. “The economy is roaring, and should continue to roar as services reopen this summer.”

“Assuming that Covid variants remain contained, the second quarter is set for a further acceleration in growth as the re-openings continue,” said economist Katherine Judge of CIBC Economics.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.16%

and S&P 500
SPX,
+0.43%

rose in Thursday trades.

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