The U.S. economy grew at a healthy clip of 5.7% in 2021 — the best rate since 1984. But inflation and expected rate increases by the Federal Reserve in 2022 will markedly slow economic growth in the future.
The 5.7% jump was the strongest calendar-year growth since a 7.2% surge in 1984 after a previous recession. This comes after the worst year of economic growth since World War II in 2020.
In the second quarter of 2020, the bottom fell out of the economy when real gross domestic product (GDP) decreased at an annual rate of 31.7% — the worst decline since the post-war recession of 1947. For the last six quarters, the economy has been struggling to recover. In effect, the economy in 2021 had nowhere to go but up.
Squeezed by inflation and still gripped by COVID-19 caseloads, the economy is expected to slow this year. Many economists have been downgrading their forecasts for the current January-March quarter, reflecting the impact of the omicron variant. And for all of 2022, the International Monetary Fund has forecast that the the nation’s GDP growth will slow to 4%.
Many U.S. businesses, especially restaurants, bars, hotels and entertainment venues, remain under pressure from the omicron variant, which has kept millions of people hunkered down at home to avoid crowds. Consumer spending, the primary driver of the economy, may be further held back this year by the loss of government aid to households, which nurtured activity in 2020 and 2021 but has mainly expired.
Looming over everything are the twin specters of higher interest rates and rising inflation. The interest rates were always going to go up, given that the Federal Reserve’s loose money policies were tied to the pandemic. But now that the pandemic has eased, the Fed is looking to start raising interest rates in order to fight inflation.
Federal Reserve officials signaled on Wednesday that they were on track to raise interest rates in March, given that inflation has been running far above policymakers’ target and that labor market data suggests employees are in short supply.
Central bankers left rates unchanged at near-zero — where they have been set since March 2020 — but the statement after their two-day policy meeting laid the groundwork for higher borrowing costs “soon.” Jerome H. Powell, the Fed chair, said officials no longer thought America’s rapidly healing economy needed so much support, and he confirmed that a rate increase was likely at the central bank’s next meeting.
More than that, the Fed’s bond-buying program will be ending soon. Begun as a measure to bolster the stock market when the shutdowns threatened to crash equities, the Federal Reserve began the buying program in March of 2020 to the tune of $2 trillion in the first three months of the pandemic. Now the Fed will begin to taper those purchases as the economy doesn’t need the stimulus anymore.
The surge in GDP was driven by a 7.9% surge in consumer spending and a 9.5% increase in private investment. But both those numbers are expected to fall in the coming year, given what happened in the fourth quarter.
For the final three months of 2021, consumer spending rose at a more muted 3.3% annual pace. But private investment rocketed 32% higher, boosted by a surge in business inventories as companies stocked up to meet higher customer demand. Rising inventories, in fact, accounted for 71% of the fourth-quarter growth.
“The upside surprise came largely from a surge in inventories, and the details aren’t as strong as the headline would suggest,″ Kathy Bostjancic, Oxford Economics’ chief U.S. financial economist, said in a research note.
Obviously, growth will be secondary to rising inflation in 2022. And given forecasts that show inflation hanging on through the year, Democrats better not count on any economic news to pull their chestnuts out of the fire in November.
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