There have been a lot of strange economic numbers over the past 14 months as the world has been whipsawed by the pandemic. But one particular line of the first-quarter GDP numbers released Thursday stands out even so.
Americans’ spending on durable goods — cars, furniture and other goods meant to last a long time — rose at a stunning 41.4% annual rate in the first three months of the year. Enjoy your Pelotons and Big Green Eggs, everybody.
The central reality of the economy in 2021 is that it is profoundly unequal across sectors, unbalanced in ways that have enormous long-term implications for businesses and workers.
The economy is recovering rapidly and is on track to reach the levels of overall GDP that would have been expected before anyone had heard of COVID-19. But that masks some extreme shifts in composition of what the United States is producing. That matters both for the businesses on the losing end of those shifts and for their workers, who may need to find their way into the growing sectors.
In such a tumultuous time, it helps to look at the GDP numbers not in terms of how they changed compared with last quarter or last year but with the pre-pandemic economy. How does the actual number in the first quarter compare with what that number would have been if it had grown at a steady 2% annual rate since the end of 2019, the last quarter unaffected by the pandemic?
This approach confirms the basic idea that the economy is not far from that pre-pandemic trend line. In the first quarter, overall GDP was only 3.3% below where it would have been in that hypothetical pandemic-free world. The United States is on track to surge above that 2019 trend in the second quarter currently underway.
But as the extreme spike in first-quarter numbers reflects, there has been a huge reallocation of economic activity toward durable goods. Spending on cars and trucks is 15.1% higher than it would have been on the 2019 trajectory, spending on furnishings and durable household equipment is 16.6% higher, and spending on recreational goods is a whopping 26% higher.
Altogether, durable-goods spending is running $348.5 billion higher annually than it would have been in that alternate universe, as Americans have spent their stimulus checks and unused travel money on physical items.
The housing sector is experiencing nearly as big a surge. Residential investment was 14.4% above its pre-pandemic trend, representing $90 billion a year in extra activity. And that was surely constrained by shortages of homes to sell, and lumber and other materials used to make them. It is poised to soar further in coming months, based on forward-looking data like housing starts.
Another bright spot is business investment in information technology. The tech industry has been comparatively unscathed by the crisis. Spending on information-processing equipment in the first quarter was 23% higher than its pre-pandemic trend, and investment in software 7.4% higher.
Then there are the losers.
The troubles of service industries, especially related to travel, are well documented. While spending on restaurants, airline tickets, concerts and other recreational activities grew in the first quarter, it was a considerably smaller surge than the one that went to physical items, and not nearly big enough to fill in the deep hole those sectors face. Spending on transportation services remains 23% below its pre-pandemic trend, recreation services 31%, and restaurants and hotels 19%.
Those three sectors alone represent $430 billion in “missing” economic activity — largely equivalent, it is worth noting, to the combined shift of economic activity toward durable goods and residential real estate.
A corollary shows up in trade data. Services exports are down 26% compared with the pre-pandemic trend, which reflects in significant part the freeze-up in global travel.
Less widely understood is a steep pullback in the energy sector.
There are two sides of the same coin: Consumer spending on gasoline and other energy goods is down 11% from its pre-pandemic trend line. And business spending on structures is down 19%, which reflects a pullback in investment by both the oil extraction industry and the commercial real estate sector.
Separately, the pullback in state and local governments, many of which have faced funding crunches, is real. Their spending is 4.3% below the pre-pandemic trend — another $89 billion in lost activity, though that is likely to return as federal stimulus dollars flow to their coffers and schools reopen.
In every recession, shifts take place in the composition of economic activity; the economy rarely looks the same after a wrenching event as it did before. But what is striking about this crisis is the scale and speed of the economy’s rewiring.
We do not yet know how fully service industries will recover as vaccinations take place or whether durable-goods spending will return to more normal levels as stimulus checks are spent and people reallocate their budgets toward travel. We also do not know whether the surge in information technology spending and the pullback in oil drilling are part of a longer-term shift in the economy (all the more so given the Biden administration’s emphasis on clean energy investment).
Moreover, to the degree these shifts in the composition of the economy may be semipermanent, we do not know how seamlessly the economy will adjust. Many former waiters or hotel clerks may be ill-suited to becoming construction workers or software engineers.
That is what makes the economy of 2021 so promising but also worrying. The boom is here. We just do not know yet how bumpy the ride will be in trying to return to something that feels like full-fledged prosperity.