The US economy capped off 2021 with another robust quarter of vigorous growth that helped to cement the fastest full-year rebound since 1984 as the country began to move past the worst of the economic damage inflicted by the coronavirus pandemic.
US gross domestic product expanded 6.9 per cent on an annualised basis in the fourth quarter, up from 2.3 per cent growth in the third quarter, the commerce department said on Thursday. That topped economists’ forecast for a 5.5 per cent advance, according to a Reuters poll.
GDP rose 1.7 per cent compared with the previous quarter, based on a measure used by other major economies. And for the full year, the economy grew 5.7 per cent, the biggest increase since 1984, a “very high note” to cap off the year, according to Oxford Economics.
Joe Biden lauded the expansion on Thursday, saying it was “no accident” given the economic policies he has put in place.
“The GDP numbers for my first year show that we are finally building an American economy for the 21st century,” he said in a statement. “My economic strategy is creating good jobs for Americans, rebuilding our manufacturing, and strengthening our supply chains here at home to help make our companies more competitive.”
Despite disappointing December retail sales data, consumer spending helped support economic growth in the fourth quarter, as Americans did their holiday shopping early amid concerns that supply chain snarls could lead to bare store shelves. Personal consumption rose 3.3 per cent in the fourth quarter, following a more modest 2 per cent 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.
Inventories contributed 4.9 percentage points to growth at the end of last year, as companies facing supply chain disruptions replenished their stockpiles to meet strong demand. However, federal, state and local government spending declined, which weighed on growth.
“It is definitely important to rebuild the stock of inventories, but the question is, is it going to last?” said Monica Defend, global head of research at Amundi. “In order to see if this growth is going to be sustainable over time, we need to look at consumption.”
One factor that may negatively affect consumption is rampant inflation, which has beset the US economy. Thursday’s report showed core personal consumption expenditures, the Federal Reserve’s preferred inflation gauge, had risen an annualised 4.9 per cent in the fourth quarter, up from 4.6 per cent the previous quarter.
While there were bright spots in the latest GDP data, Simona Mocuta, senior economist at State Street Global Advisors, warned they were “misleadingly strong”.
“The bigger story is that the consumer backdrop is changing,” she said, noting that consumers were beginning to draw down the excess savings accumulated during the pandemic rather than add to them. “That will make a big difference in terms of the strength of demand over the course of the year.”
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. As a result, consumption was likely to take another hit, Defend said.
The IMF this week warned that the global economic recovery from the pandemic would face multiple hurdles. It slashed its forecast for US economic growth this year to 4 per cent, down from 5.2 per cent in its October outlook.
Federal Reserve chair Jay Powell on Wednesday said he expected 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.
Powell also refused to rule out sequential interest rate increases at the Fed’s remaining seven meetings this year, as well as the possibility of raising rates by increments larger than the typical quarter of a percentage point.
With markets pencilling in at least four rate rises this year and the Fed rapidly shrinking the size of its balance sheet, there are concerns 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”.
Mocuta warned that it could be a mistake for the Fed to pursue too hawkish of a stance against inflation with economic growth set to moderate.
“It is a tricky situation,” she said. “It makes perfect sense for the Fed to begin this process . . . but there are other risks out there that we should not lose sight of.”