The U.S. economy grew at a much better-than-expected pace to end 2021 from sizeable boosts in inventories and consumer spending, and despite signs that the acceleration likely tailed off toward the end of the year.
Gross domestic product, the sum of all goods and services produced during the October-through-December period, increased at a 6.9% annualized pace, the Commerce Department reported Thursday. Economists surveyed by Dow Jones had been looking for a gain of 5.5%.
The increase was well above the unrevised 2.3% growth in the third quarter and came despite a surge in Covid omicron cases that likely slowed hiring and output as businesses dealt with large numbers of sick workers.
Gains came from increases in private inventory investment, strong consumer activity as reflected in personal consumption expenditures, exports, and business spending as measured by nonresidential fixed investment.
Across-the-board decreases in the pace of government spending subtracted from GDP, as did imports, which are measured as a drag on output.
The quarter brought an end to a 2021 that saw a 5.7% increase in annualized GDP, the strongest pace since 1984 as the U.S. tried to pull away from the unprecedented drop in activity during the early days of the coronavirus pandemic.
Markets reacted positively to the news, with stock futures posting gains while government bond yields were mixed.
“The strength of the economy last year stood in stark contrast to the collapse in activity in early 2020, but also speaks to the success of both the public and private sector in quickly adapting to the unprecedented challenges created by the pandemic,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “That being said, potential headwinds still exist, as the global risks associated with the COVID-19 pandemic persist.”
That being said, potential headwinds still exist, as the global risks associated with the COVID-19 pandemic persist. Labor conditions in the U.S. remain exceptionally tight, while constraints on production and kinks in the global supply chain are proving more difficult to fix than policymakers had anticipated a year ago.
In other economic news Thursday, jobless claims totaled 260,000 for the week ended Jan. 22, slightly less than the 265,000 estimate and a decline of 30,000 from the previous week.
Also, orders for long-lasting goods declined 0.9% for December, worse than the estimate for a 0.6% drop. Orders for durables hit their lowest point since April 2020, reflecting an end-of-year slowdown as omicron cases skyrocketed. The decline was driven largely by a 3.9% slump in transportation orders.
The GDP report, though, reflected an overall solid period for the economy after output had slowed considerably over the summer. Supply chain issues tied to the pandemic coupled with robust demand spurred by unprecedented stimulus from Congress and the Federal Reserve led to imbalances across the economic spectrum.
Consumer activity, which accounts for more than two-thirds of GDP, rose 3.3% for the quarter. Gross private domestic investment, a gauge of business spending and inventory build, soared 32%.
Inventories added 4.9 percentage points to the headline growth, boosted in particular by motor vehicle dealers, the Bureau of Economic Analysis said.
Impact on policy
Economic growth came as inflation surged in 2021, particularly in the second half of the year, as supply couldn’t keep up with strong demand, particularly for goods over services.
The U.S. heads into 2022 on uncertain footing, with Fed Chairman Jerome Powell warning Wednesday that growth in the early part of the year is slowing, though he views the economy overall as strong.
To that measure, the Fed telegraphed a March interest rate hike, the first since 2018. Central bankers also expect to end their monthly asset purchases the same month and to start unwinding their bond holdings shortly after.
Those tightening moves come in response to inflation running at its highest pace in nearly 40 years. Data on the Fed’s preferred inflation gauge, the personal consumption expenditures price index, will be released Friday morning.
The fourth-quarter data reflected those price pressures as well, with the price index for gross domestic purchases up 6.9% in the fourth quarter and 3.9% for the full year. The Fed considers 2% a healthy level for inflation, though a new policy approach adopted in 2020 allows for higher levels over a short period of time in the interest of generating full employment.
Powell said Wednesday that Fed officials believe they have largely achieved both ends of their employment/inflation mandate and are ready to start raising rates and otherwise tightening monetary policy.