As the country recovered fast from the pandemic-induced recession, the US economy expanded at a 6.9% annual pace in the fourth quarter of last year, concluding the best year of growth in nearly four decades.
However, experts think that recent expansion has hit stumbling blocks, which might result in more moderate growth this year.
The Commerce Department said Thursday that gross domestic product, the broadest measure of goods and services, grew 2.4 percent in the fourth quarter, up from 2.3 percent in the third quarter, adjusted for inflation. The increase reflected strong consumer spending, much of it early in the quarter, as well as firms’ efforts to replenish depleted stocks in the face of continuing supply shortages.
When comparing the fourth quarter of 2021 to the same period the previous year, output increased by 5.5 percent. The economy hasn’t risen so quickly since President Ronald Reagan’s first term in 1984, when the country was emerging from a double-dip recession and a period of high inflation.
In 2020, output fell by 2.3 percent, the first drop since the 2008 property crisis and financial meltdown.
“The U.S. has learned to adapt to the new world of variants and continues to produce,” said Beth Ann Bovino, chief U.S. economist at S&P Global Ratings.
Following the release of the GDP figure, stocks rallied broadly in the morning, but later in the day, with the Nasdaq down 1.4 percent, the S&P 500 down 0.54 percent, and the Dow Jones Industrial Average down 0.02 percent.
Thursday’s report contained warning signs. Most of the growth owed to companies’ restocking rather than people and firms buying stuff. In part, the rise in inventory investment reflected a rebound from super-low inventory levels in the summer. Inventory levels remain low because of persistent shortages. Excluding the inventory effects, output grew at a modest annual rate of 1.9% in the fourth quarter.
Americans reined in shopping toward the end of the quarter, according to other Commerce Department data on retail sales, as the Omicron variant of Covid-19 triggered a new wave of infections and higher prices cut into their paychecks. A separate Commerce Department report Thursday showed sales of durable goods — long-lasting items such as cars, refrigerators and bulldozers — fell in December.
“The headline 6.9% figure is probably a bit overly optimistic assessment of the underlying strength of demand,” said Andrew Hunter, chief U.S. economist at the research firm Capital Economics. “We do think it’s increasingly the case that the economy is essentially at or rapidly approaching that capacity-constrained, potential level…The speed limit is lower now than it was before the pandemic.”
Two factors that fueled last year’s boom are starting to fade: a flood of cash from Congress to consumers and ultralow borrowing costs fueled by the Federal Reserve’s loose-money policies. Much of the stimulus money has been spent by households. Also this week, the Federal Reserve maintained its goal to hike interest rates as early as March to counteract a strong surge in inflation that has harmed consumer confidence and outpaced wage growth.
The price index for personal consumption expenditures, the Fed’s favored inflation indicator, increased at an annual pace of 6.5 percent in the fourth quarter, up from 5.3 percent in the third quarter and more than double the growth rate seen in the months preceding up to the pandemic.
“The path of the economy continues to depend on the course of the virus, ” the Fed said in a written statement this week. “Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.”
Most economists think U.S. output will grow modestly this year. Americans still have higher savings compared to before the pandemic, and jobs are plentiful. “Household balance sheets look to be the healthiest basically since we’ve been tracking this data” starting in the 1980s, Dr. Bovino of S&P Global Ratings said.
The biggest challenge for the economy right now is not demand, but supply.
While U.S. producers are making more goods and services than they did prior to the pandemic, they are doing so with fewer workers. Employment across the U.S. was down by 3.6 million workers, or 2.3%, in December 2021 compared to February 2020, Labor Department data show.
“Businesses are not only struggling to get the goods components to make the product, they need the people as well to put the components together, ” Dr. Bovino said.
The Labor Department said Thursday that initial unemployment claims — a gauge of how many people were laid off — decreased by 30,000 last week, the latest indicator of a tight labor market.
While economists and health experts anticipate the Omicron variant’s impacts to subside in the coming months, the sickness is now stifling the economy’s recovery.
Strum Contracting Co., a welding and fabrication construction business located in Baltimore, had been working on improving a port in Sparrows Point, south of Baltimore, until early this month. Then, according to firm CEO Teaera Strum, an epidemic of Covid-19 infections among staff forced the company to shut down the project for a week. According to her, the stoppage cost the firm around $18,000 in missed revenue.
“When you’re having to quarantine entire crews, that puts you behind schedule,” said Ms. Strum, who added that the company has also struggled to fill openings for welders and a project manager. “Because we do a lot of state and federal work, we still have hard deadlines. So Covid or not, we still have to meet those deadlines.”
Strum’s struggles are representative of a broader problem in the economy: Demand for companies has been solid, if not strong, but supplies — whether of goods or workers — are running tight. Those shortages are stoking inflation.
The forecasting firm IHS Markit projects that output will grow at a 2% annual rate in January through March. That would mark the weakest quarter of growth since the recovery began in mid-2020. The company gave an early peek at economic growth this week when it reported that its index of U.S. services and manufacturing activity — covering most of economic activity — slowed sharply.
