The US economy ended 2021 expanding at a healthy 6.9 percent annual pace from October through December, the government reported on Wednesday, a slight downgrade from its earlier estimates.
For all of 2021, the nation’s gross domestic product (GDP), its total output of goods and services, rose 5.7 percent, the fastest annual growth since a 7.2 percent rise in 1984 after a brutal recession.
Previously, the government estimated that growth in the fourth quarter of last year was 7 percent. The small downgrade reflected a smaller increase in consumer spending and fewer exports, the Commerce Department said.
Looking ahead, however, growth is likely to slow sharply this year, particularly in the first three months of 2022. Higher inflation is likely to weigh on consumer spending as Americans take a shorter view. gloomy economy. Home sales have fallen as the Federal Reserve began raising borrowing costs, prompting a sharp rise in mortgage rates. Exports may weaken as foreign economies take a hit from the Russian invasion of Ukraine.
For the January-March quarter of this year, the biggest drag will be a sharp reduction in the amount of goods that companies replenish on their shelves and in warehouses. In the fourth quarter of last year, companies carried a large inventory build in an effort to get ahead of supply chain problems for the winter holidays.
That inventory restocking added nearly 6 percentage points to fourth-quarter growth, a boost not repeated in the first three months of this year. And strong consumer spending likely drew more imports in the first quarter, economists forecast, while a stronger dollar and slower growth abroad curbed US exports. The combination should also weaken the economy in the first quarter.
Economists forecast that growth could fall as much as 0.5 percent in the first three months of the year and even slip into negative territory.
Still, the first quarter will likely be a temporary setback. As the pandemic continues to subside, more Americans are traveling, eating out, and flying. Companies are hiring at a healthy rate and raising wages. The higher income isn’t enough to fully offset inflation, but it should support continued consumer spending.
Wednesday’s figure represents the third and latest estimate of fourth-quarter growth. The government issues three estimates of US GDP each quarter. Each report includes more comprehensive source data.
The figures are adjusted for inflation, which has soared to 40-year highs. Consumer spending rose 2.5 percent in the fourth quarter, down from the previous estimate of 3.1 percent. Economists expect spending to remain healthy in the first quarter, even as overall growth slows.
Corporate earnings growth, which has drawn political attention as a potential contributor to inflation, slowed in the fourth quarter. Earnings were up $20 billion, or about 0.7 percent, in the October-December quarter from the previous one. That was down from a huge jump of nearly $268 billion, or 10.5 percent, in the second quarter.
The Federal Reserve forecasts that the US economy will expand 2.8 percent this year, much less than in 2021 but still at a solid pace.
Accelerating inflation has prompted Fed Chairman Jerome Powell to signal multiple hikes in his benchmark short-term interest rate this year, with one or more of the hikes likely to be half a point instead of the usual hike. of a quarter point. Such increases make it more expensive to get auto or home loans, and also increase credit card interest rates.
At a meeting earlier this month, Fed policymakers raised their benchmark rate to about 0.375 percent, from near zero, where it had been since the pandemic hit two years ago. Officials forecast they will raise the rate at least six more times this year to around 1.9 percent, though Powell’s comments suggest it could go higher, particularly if inflation shows no signs of cooling in coming months.
Rapidly rising interest rates could slow growth and cool hiring. The Fed hopes to achieve a “soft landing” in which inflation falls back closer to the central bank’s 2 percent target, without the economy slipping into recession. But many economists worry that higher rates could cause a recession.