The US economy ended 2021 by expanding at a healthy 6.9% annual rate from October to December, the government reported Wednesday, down slightly from previous estimates.
For all of 2021, the nation’s gross domestic product (GDP) – the total output of goods and services – grew by 5.7%, the fastest growth in a calendar year since a 7.2% increase. in 1984 after a devastating recession.
Previously, the government estimated growth in the fourth quarter of last year at 7%. The small drop in ratings reflects increased consumer spending and less exports, the Commerce Department said.
Going forward, however, growth is likely to slow sharply this year, especially in the first three months of 2022. Higher inflation is likely to weigh on consumer spending as Americans have more money to spend. dim view of the economy. Home sales fell as the Federal Reserve began to push up borrowing costs, leading to a sharp rise in mortgage rates. Exports could weaken as economies abroad are disrupted by Russia’s invasion of Ukraine.
For the first quarter to March this year, the biggest drag will be the sharp drop in the amount of goods that businesses have on their shelves and warehouses. In the fourth quarter of last year, companies engaged in a large amount of inventory in an attempt to resolve supply chain problems for the winter break.
That inventory stockpile added nearly six percentage points to fourth-quarter growth, an increase not repeated in the first three months of this year. Economists expect solid consumer spending and imports to drag more in the first quarter, while a stronger dollar and slower growth abroad dampened US exports. The combination will also weaken the economy in the first quarter.
Economists forecast that growth could drop to as low as 0.5% in the first three months of the year and could even fall into negative territory.
However, the first quarter is likely to be a temporary hit. As the pandemic continues to subside, more and more Americans are traveling, dining, and flying. Businesses are hiring at good prices and increasing wages. Higher incomes will not be enough to fully offset inflation but will support continued consumer spending.
Wednesday’s numbers represent the third and final estimate of fourth-quarter growth. The government makes three estimates for US GDP each quarter. Each report includes more complete source data.
The figures are adjusted for inflation, which has soared to a 40-year high. Consumer spending rose 2.5% in the fourth quarter, down from a previous estimate of 3.1%. Economists expect spending to remain flat in the first quarter, even as overall growth slows.
Corporate earnings growth, which has drawn political attention as a potential driver of inflation, slowed in the fourth quarter. Profits grew by $20 billion, or about 0.7%, in the October-December quarter from the previous quarter. This is down from a spike of nearly $268 billion, or 10.5%, in the second quarter.
The Federal Reserve forecasts the US economy will grow 2.8% this year, much lower than in 2021 but still at a solid pace.
The rise in inflation has prompted Fed Chair Jerome Powell to signal multiple short-term benchmark rate hikes this year, with one or more hikes possibly half a point from the usual quarterly rise. Such increases make it more expensive to get a mortgage or car loan, while also increasing credit card interest rates.
At a meeting earlier this month, Fed policymakers raised their benchmark interest rate to about 0.375 percent, up from near zero, the level it has held since the pandemic hit two years ago. . Officials forecast they will raise interest rates at least six more times this year to around 1.9%, although Powell’s comments suggested it could move higher, especially if inflation shows no sign cool down in the coming months.
Rapidly rising interest rates can slow growth and reduce hiring. The Fed hopes to make a “soft landing,” in which inflation returns near the central bank’s 2% target, without the economy slipping into a recession. But many economists worry that higher rates could trigger a recession.
