The US economy ended 2021 growing October-December at a healthy annual pace of 6.9 percent, the government reported on Wednesday, a slight downgrade from its earlier estimates.
For all of 2021, the country’s gross domestic product — its total production of goods and services — rose 5.7 percent, the fastest calendar-year growth since a 7.2 percent surge in 1984 following a brutal recession.
The government had previously estimated growth in the fourth quarter of last year at 7 percent. The slight downgrade reflected a slower rise in consumer spending and fewer exports, the Commerce Department said.
However, looking ahead, growth is likely to slow sharply this year, especially in the first three months of 2022.
Economists are forecasting that first-quarter growth could slip as low as 0.5 percent and even turn negative as inflation and commodity shortages weigh on the economy.
New data released on Wednesday revised fourth-quarter GDP growth downwards slightly
Quarterly GDP growth at an annualized rate is observed from 1980 to the most recent quarter
Higher inflation is likely to weigh on consumer spending as Americans take a gloomier view of the economy.
Bloomberg economists warn that the average American should budget an extra $5,200 for higher prices this year — or an extra $433 each month.
Economists Andrew Husby and Anna Wong write that households can expect to pay thousands more in 2022 for the same basket of goods and services they used last year.
“The excess savings and wage increases built up during the pandemic will cushion these costs and allow spending to rise at a reasonable pace this year,” they wrote.
“But accelerated savings depletion will increase urgency for those remaining on the fringes of the labor force, and the resulting increase in labor supply will likely dampen wage growth.”
Economists estimate that higher food and energy costs will account for about $2,200 of the additional $5,200 households are expected to pay this year.
Meanwhile, home sales have declined as the Federal Reserve has started raising the cost of borrowing, causing mortgage rates to rise sharply. Exports may weaken as overseas economies are disrupted by Russia’s invasion of Ukraine.
Private services led GDP growth in the fourth quarter of 2021, new data shows
Information services were a major contributor to real GDP growth in the last quarter
For the January-March quarter of this year, the biggest drag will be a sharp drop in the amount of goods that companies are restocking on their shelves and warehouses.
In the fourth quarter of last year, companies embarked on massive inventory builds to forestall supply chain issues for the winter holidays.
That inventory replenishment added nearly 6 percentage points to growth in the fourth quarter, a spurt not repeated in the first three months of this year.
And solid consumer spending is likely to have boosted imports in the first quarter, economists predict, while a stronger dollar and slower overseas growth reduced US exports. The combination is likely to weaken the economy in the first quarter as well.
Still, the first quarter will likely be a temporary hiccup. As the pandemic continues to abate, more Americans are traveling, eating out and flying.
Companies are hiring at a healthy price and increasing wages. Higher income is not enough to fully offset inflation but should support continued consumer spending.
Wednesday’s figure represents the third and final estimate of fourth-quarter growth. The government releases three estimates of US GDP each quarter. Each report contains more complete source data.
An employee works on the 40 millionth Ford Motor Co. F-Series truck on the assembly line at the Ford Dearborn Truck Plant January 26, 2022 in Dearborn, Michigan
Inflation in the United States hit a new 40-year high in February at 7.9%
The figures are adjusted for inflation, which has risen to a four-decade high. Consumer spending rose 2.5 percent in the fourth quarter from the previous estimate of 3.1 percent.
Economists expect spending to remain healthy in the first quarter even as headline growth slows.
Corporate earnings growth, which has attracted political attention as a potential contributor to inflation, slowed in the fourth quarter.
Earnings rose $20 billion, or about 0.7 percent, in the October-December quarter sequentially. That’s down from a whopping jump of nearly $268 billion, or 10.5 percent, in the second quarter.
The Federal Reserve projects the US economy will grow 2.8 percent this year, much less than in 2021 but still a solid pace.
Accelerating inflation has prompted Fed Chair Jerome Powell to announce several increases in his benchmark short-term interest rate this year, with one or more of the increases possibly being a half-point, as opposed to the usual quarter-point increase.
Such increases make it more expensive to take out mortgage or car loans and also increase credit card interest rates.
At a meeting earlier this month, Fed policymakers raised interest rates from almost zero to about 0.375 percent, where they have been since the pandemic began two years ago.
Officials forecast they will raise the rate at least six more times this year to about 1.9 percent, although comments from Powell suggest it could get higher, especially if inflation shows no signs of slowing in the coming months.
Rapidly rising interest rates could slow growth and reduce hiring.
The Fed is hoping for a “soft landing” that will see inflation return closer to the central bank’s 2 percent target without sending the economy into recession. However, many economists fear that the higher interest rates could cause a downturn.