Economists Predict 7% Economy Growth, Prompted by Stimulus Packages

Economists are predicting rapid growth in the U.S economy as people resume their pre-pandemic spending habits.

The nation's economy grew at a 6.4 percent annual rate last quarter, prompted by government aid, widespread vaccinations, healthy job gains and the reopening of businesses.

For 2021 as a whole, economists expect the economy to expand close to 7 percent, which would be the fastest calendar-year growth since 1984.

"The economy is on fire," Sung Won Sohn, a finance and economics professor at Loyola Marymount University, told the Associated Press before Thursday's gross domestic product (GDP) report was released. "It is being fueled by the vaccine, which is the best economic stimulus we have, plus massive government spending."

This rebound from the pandemic recession is spurred by the $1,400 stimulus payments and other rescue aid from President Joe Biden's $1.9 trillion relief package, which was passed by Congress in March.

Additionally, Biden is proposing two more spending packages. During his address to Congress Wednesday night, he promoted his $2.3 trillion infrastructure plan and a $1.8 trillion investment in children, families and education.

COVID Stimulus Spending
People with and without masks sit at the Hollywood & Highland shopping center in Hollywood, California, on April 21. A return to pre-pandemic spending habits has led to fast growth in the U.S. economy. Alexi Rosenfeld/Getty Images

For more reporting from the Associated Press, see below:

The nation's GDP—its total output of goods and services—accelerated in the January-March quarter from a 4.3 percent annual gain in the last quarter of 2020, the government said Thursday. Growth in the current April-June period is expected to be faster still: Some economists say it could reach a 10 percent annual rate or more, driven by a surge in people traveling, shopping, dining out and otherwise resuming their spending habits.

The government also said Thursday that the number of Americans seeking unemployment aid reached a new pandemic low last week. Though layoffs remain elevated, they are steadily easing as the economy more fully reopens.

The Federal Reserve's ultra-low interest rate policy, which is intended to encourage borrowing and spending, has provided significant support too. In fact, the economy is expected to expand so fast that some economists have raised concerns that it could ignite inflation.

In part, this is because stronger demand has caused supply bottlenecks and shortages of some goods and components, notably semiconductors, which are critical to the auto, technology and medical device industries, among others.

At a news conference Wednesday after the Fed's latest policy meeting, though, Chair Jerome Powell reiterated his confidence that any surge in inflation would prove temporary. And he said the Fed wants to see a substantial and sustained recovery before it would consider withdrawing its economic support. In the meantime, Powell made clear, the central bank isn't even close to beginning a pullback in its ultra-low rate policies.

The strength of the rebounding U.S. economy has been particularly striking given the scope of damage the pandemic inflicted on it beginning in March of last year. With businesses all but shut down, the economy contracted at a record annual pace of 31% in the April-June quarter of last year before rebounding sharply in the subsequent months.

In recent weeks, the economic gains have become increasingly evident. In March, U.S. employers added 916,000 jobs—the biggest burst of hiring since August. At the same time, the pace of layoffs has dwindled, retail spending has surged, manufacturing output is up and consumer confidence has reached its highest point since the pandemic began.

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 last year.

Business investment rose at a strong annual rate of nearly 10 percent, reflecting a burst of spending on equipment. The residential sector, which has been 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.

Last 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 pandemic 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."

Economic Growth Government Spending
A member of the wait staff delivers food to outdoor diners along the sidewalk at the Mediterranean Deli restaurant in Chapel Hill, North Carolina, on April 16. The U.S. economy grew at a brisk 6.4 percent annual rate last quarter, a show of strength fueled by government aid and declining viral cases that could drive further gains as the nation quickly rebounds from the pandemic recession. Gerry Broome/AP Photo