US economy regained speed in Q4; 2021 growth best since 1984

January 28, 2022

WASHINGTON: U.S. economic growth accelerated in the fourth quarter as businesses replenished depleted inventories to meet strong demand for goods, helping the nation to post its best performance in...

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WASHINGTON: U.S. economic growth accelerated in the fourth quarter as businesses replenished depleted inventories to meet strong demand for goods, helping the nation to post its best performance in nearly four decades in 2021.

Gross domestic product increased at a 6.9 percent annualized rate last quarter, the Commerce Department said in its advance GDP estimate on Thursday. That followed a 2.3 percent growth pace in the third quarter. Economists had forecast GDP growth rising at a 5.5 percent rate. Estimates ranged from as low as a 3.4 percent rate to as high as a 7.0 percent pace.

The economy grew 5.7 percent in 2021, the strongest since 1984. It contracted 3.4 percent in 2020, the biggest drop in 74 years.

Growth last year was fueled by massive fiscal stimulus as well as very low interest rates. The momentum, however, appears to have faded by December amid an onslaught of Covid-19 infections, fueled by the Omicron variant, which contributed to undercutting spending as well as disrupting activity at factories and services businesses.

Last year's robust growth supports the Federal Reserve's pivot towards raising interest rates in March.

Fed Chair Jerome Powell told reporters on Wednesday after a two-day policy meeting that "the economy no longer needs sustained high levels of monetary policy support," and that "it will soon be appropriate to raise" rates.

The sharp rebound in growth last year could offer some cheer for President Joe Biden whose popularity is falling amid a stalled domestic economic agenda after the US Congress failed to pass his signature $1.75 trillion Build Back Better legislation. It, however, diminishes prospects of more money from the government.

Inventory investment accounted for the bulk of the increase in GDP growth in the fourth quarter. Businesses had been drawing down inventories since the first quarter of 2021. Spending shifted during the pandemic to goods from services, a demand boom that pressured supply chains.

Growth last quarter was also lifted by a jump in consumer spending in October before retreating considerably as Omicron spread across the country. Consumer spending, which accounts for more than two-thirds of economic activity, has been hampered by shortages of motor vehicles and other goods. A global chip shortage is hurting production.

Reduced household purchasing power, with inflation way above the Fed's 2 percent target, also hindered consumer spending at the tail end of the fourth quarter.

The Omicron-driven outbreak in infections has also impacted the labor market, though this is likely temporary. Employers are desperate for workers, with 10.6 million job openings at the end of November.

A separate report from the Labor Department on Thursday showed initial claims for jobless benefits dropped 30,000 to a seasonally adjusted 260,000 during the week ended Jan. 22.

Despite the anticipated soft patch in the first quarter because of challenges from the never ending pandemic, the worst inflation in decades, supply chain bottle necks and upcoming interest rate increases, the economy is expected to soldier on this year, with growth estimates as high as 3.9 percent.

Analysts said despite disappointing December retail sales data, consumer spending helped support economic growth, as Americans did their holiday shopping early amid concerns that supply chain snarls could lead to bare store shelves.

Personal consumption rose 3.3 percent in the fourth quarter, following a more modest 2 percent rise the previous quarter. “The increase in real GDP primarily reflected increases in private inventory investment, exports, personal consumption expenditures, and nonresidential fixed investment,” the commerce department said.

Economists have cautioned that the wave of Covid-19 infections sparked by Omicron will deliver a sharp but shortlived hit to economic activity at the start of 2022.

Americans cut back on dining out and air travel, while plans for workers to return to their offices were delayed, which affected spending in commercial areas.

The IMF this week cautioned that the global economic recovery from the pandemic will face multiple hurdles. It slashed its forecast for US economic growth this year to 4 percent, down from 5.2 percent in its October outlook.

Powell said he expects some softening in the economy from the Omicron wave that began to ripple across the US in late December, but that the effects would be temporary.

The Fed has looked past Omicron concerns and signalled its intention to raise interest rates in March as it pushes ahead with plans to tighten monetary policy and quash stubbornly high inflation.

With markets pencilling in four rate rises and balance sheet run-off this year, concerns have grown that aggressive tightening could take some steam out of the economy.

But James Knightley, chief international economist at ING, said “it could actually boost confidence in that they are getting a grip as inflation is a real concern for households and businesses”. —AFP/News Desk

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