U.S. economy likely regained steam in Q4, 2021 growth seen best in 37
years
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[January 27, 2022] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. economic growth
likely accelerated in the fourth quarter as businesses replenished
depleted inventories to meet strong demand for goods, helping the nation
to log its best performance in nearly four decades in 2021.
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.
The Commerce Department's advance fourth-quarter gross domestic product
report on Thursday would support the Federal Reserve's pivot toward
raising interest rates in March, and diminish prospects of more spending
by President Joe Biden's government.
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.
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"We had a strong tailwind from inventory accumulation, and that boosted
growth," said Sung Won Sohn, finance and economics professor at Loyola
Marymount University in Los Angeles. "We spent so much money in the
past. The Biden administration has over-stimulated the economy and the
Fed supported that effort."
According to a Reuters survey of economists, GDP growth likely increased
at a 5.5% annualized rate last quarter. That would be a jump from the
2.3% pace in the third quarter.
Estimates ranged from as low as a 3.4% rate to as high as a 7.0% rate.
But the survey was conducted before the release on Wednesday of data
showing a record goods trade deficit in December and a surge in retail
inventories.
The strong retail inventory accumulation led economists, including those
at JPMorgan, to raise their GDP growth estimates to as high as to a 7.5%
rate.
For all of 2021, growth is estimated at 5.6%, which would be the
strongest since 1984. The economy contracted 3.4% in 2020, the biggest
drop in 74 years.
The sharp rebound in growth last year could offer some cheer for
President Biden whose popularity is falling amid a stalled domestic
economic agenda after the U.S. Congress failed to pass his signature
$1.75 trillion Build Back Better legislation.
ALL ABOUT INVENTORIES
Inventory investment is expected to have 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.
JPMorgan estimated that inventories grew at a $167 billion rate last
quarter after adjusting for inflation.
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![](../images/012722pics/busine41.jpg)
Warehouse workers deal with inventory stacked up to the ceiling at
an ABT Electronics Facility in Glenview, Illinois, U.S. December 4,
2018. REUTERS/Richa Naidu/File Photo
![](http://archives.lincolndailynews.com/2022/Jan/27/images/ads/current/debbiesfloral_lda_VALENTINES_2020.png)
Excluding inventories, GDP growth likely increased at a rate of about 2.5%.
Growth last quarter was also seen lifted by a jump in consumer spending in
October before it retreated 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 households purchasing power, with inflation way above the Fed's 2%
target, also hindered consumer spending at the tail end of the fourth quarter.
"It appears that Omicron is doing meaningful damage to the economy this
quarter," said Ryan Sweet, a senior economist at Moody's Analytics in West
Chester, Pennsylvania. "The good news is that daily confirmed COVID-19 cases in
the U.S. are declining, and if this is sustained, the worst of this wave's hit
to growth could be behind us."
The Omicron-driven outbreak in infections has also impacted the labor market,
with first-time applications for unemployment benefits vaulting to a three-month
high in mid-January.
Data from the Labor Department on Thursday is likely to show initial claims for
jobless benefits dropped 26,000 to a seasonally adjusted 260,000 during the week
ended Jan. 22, according to a Reuters survey.
Support to GDP growth last quarter also likely came from business spending on
equipment, which is expected to have rebounded after being held back in the
July-September period by shortages of trucks.
Trade was probably a drag on GDP growth for a sixth straight quarter, while the
housing market likely regained its footing after contracting for two consecutive
quarters. Still, the sector remains constrained by expensive building materials,
which has resulted in a record backlog of homes yet to be built.
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Despite the anticipated soft patch in the first quarter because of challenges
from the never-ending pandemic, the worst inflation in decades, supply chain
bottlenecks and upcoming interest rate increases, the economy is expected to
soldier on this year, with growth estimates as high as 3.9%.
"We see the economy continuing to grow above its natural speed limit through
this year amid still-solid demand, a need to replenish severely depleted
inventory levels and manufacturers' obligation to meet record levels of
backlogged orders," said Sam Bullard, a senior economist at Wells Fargo in
Charlotte, North Carolina.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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