U.S. Economy Boosts as Fourth-Quarter GDP Displays Strongest Year in Decades

During the fourth quarter of last year, the U.S. economy increased at an annual pace of 6.9 percent, concluding the biggest year of growth in almost four decades as the nation recovered fast from a pandemic-induced recession that began in 2009.

However, progress has lately encountered roadblocks, resulting in more moderate growth this year.

According to data released Thursday by the Commerce Department, inflation-adjusted growth in gross domestic product, the broadest measure of goods and services, increased to 3.4 percent in the fourth quarter, from 2.3 percent in the third quarter.

The increase was due to strong spending by consumers, with most of it happening early in the quarter and businesses’ efforts to replenish depleted stocks as they attempted to overcome chronic supply constraints.

Grants to GDP 2021 yearly change

When comparing the fourth quarter of 2021 to the same time the previous year, output increased by 5.5 percent. It was the fastest economic growth the nation had seen since 1984, during President Ronald Reagan’s first term, when the country was recovering from a double-dip recession and a period of high inflation.

2.3 percent decrease in output in 2020, marking the first decline since the housing crisis and financial catastrophe of 2008.

“The United States has learned to adjust to the new world of variations and has continued to produce,” said Beth Ann Bovino, chief economist for the United States at S&P Global Ratings.

Stocks generally soared on Thursday morning on the release of the GDP figure, but they fell sharply later in the day, with the Nasdaq shedding 1.4 percent, the S& P 500 shedding 0.54 percent, and the Dow Jones Industrial Average shed 0.02 percent, respectively.

Change in Gross Domestic Product (GDP) in the United States from the previous quarter.

The study released on Thursday highlighted red flags. The majority of the rise may be attributed to corporations replenishing their inventories rather than individuals and businesses purchasing goods. The increase in inventory investment might be attributed to a comeback from record-low inventory levels seen throughout the summer.

Inventory levels have remained low as a result of the ongoing shortages. When inventory effects are taken into account, production increased at a moderate annual pace of 1.9 percent in the fourth quarter.

As a result of the Omicron form of Covid-19 causing a fresh wave of infections and increased costs cutting into their paychecks, according to other Commerce Department statistics on retail sales, Americans cut down on spending near the end of the quarter.

According to a second Commerce Department data released on Thursday, sales of durable goods, including long-lasting products like automobiles, refrigerators, and bulldozers, declined in December.

In the words of Andrew Hunter, chief U.S. economist at research company Capital Economics, “the headline 6.9 percent number is certainly an excessively optimistic appraisal of the underlying strength of demand.”

“We believe that the economy is gradually nearing, if not already at, the capacity-constrained, potential level. ” It is now safer to go at a slower pace than it was before the epidemic.”

Change in Gross Domestic Product (GDP) in the United States from the same period the previous year.

Two factors that contributed to the increase last year are fading: a flood of cash from the federal government to individuals and ultralow borrowing rates fueled by the Federal Reserve’s loose-money policies, which are both on the decline.

Households have spent down a portion of the federal stimulus funds provided. In addition, the Federal Reserve repeated this week its aim to increase interest rates, perhaps as early as March, to battle a strong spike in inflation that has harmed consumer confidence while outpacing pay growth among workers.

The price index for personal consumption expenditures, which is the Fed’s preferred inflation measure, increased at an annual rate of 6.5 percent in the fourth quarter, accelerating from the previous quarter’s 5.3 percent growth rate and more than tripling the rate of growth in the period immediately preceding the pandemic, according to the Fed’s data.

According to a written statement issued by the Federal Reserve this week, “the direction taken by the economy continues to be determined by the course of the virus.”

It is projected that progress in immunizations and alleviation of supply limitations would contribute to ongoing economic activity, employment growth, and a decrease in inflation. “Risks to the economic outlook continue to exist, especially those posed by emerging virus strains.”

Gross Domestic Product (GDP) in the United States (quarterly)

The majority of economists predict that the United States’ production will expand little this year. Americans still have larger savings than before the outbreak, and plenty of jobs are available.

Dr. Bovino of S&P Global Ratings said that “household balance sheets seem to be in the best shape we’ve seen practically since we’ve been following this data,” which began in the 1980s.

It is not demanding but rather supply, the most significant difficulty facing the economy.

While producers in the United States are producing more products and services than before the epidemic, they do it with fewer employees. According to Labor Department statistics, employment in the United States decreased by 3.6 million employees, or 2.3 percent, in December 2021 compared to February 2020.

According to Dr. Bovino, businesses are not only fighting to get the products and components necessary to manufacture a product, but they are also in need of the people who will put the components together.

According to the Labor Department, initial unemployment claims, which gauge how many people were laid off, declined by 30,000 last week, the latest indication of a tight labor market.

Must read: Greatest winners and losers from the Fed’s interest rate conclusion

While economists and health experts anticipate that the impacts of the Omicron variety will decrease in the coming months, the sickness is preventing the economy from fully recovering for the time being.

According to the company, Strum Contracting Co., a welding and fabrication construction business located in Baltimore, worked on improving a port in Sparrows Point, south of Baltimore, until the beginning of this month.

After then, an epidemic of Covid-19 among staff forced the firm to halt the project for a week, according to Teaera Strum, the company’s chief executive. According to her, the outage cost the firm almost $18,000 in missed revenue.

“When you have to isolate whole teams, it throws you behind schedule,” Ms. Strum said, adding that the business has also had difficulty filling positions for welders and a project manager.

Because we undertake a lot of state and federal business, we are subject to strict timelines.” So whether we use Covid or not, we must still make our deadlines.”

In many ways, Strum’s challenges are symbolic of a larger issue in the economy: Demand for enterprises has been steady, if not robust, but supplies of products and labor, both are in short supply. These shortages are fueling inflation.

According to the forecasting agency IHS Markit, production will expand at 2 percent each year from January to March. As a result, it would be the worst quarter of growth seen since the recovery started in the second half of 2020.

This week, the corporation provided an early indication of economic expansion. It claimed that the index of services and industrial activity in the United States, which covers the vast majority of economic activity, has slowed significantly.