Fiscal stimulus propels US economy in 2021 to best performance since 1984
- Fourth quarter GDP increases at a rate of 6.9%
- Investment in inventories accounts for most of the growth
- The economy grows by 5.7% in 2021
- Weekly jobless claims fall from 30,000 to 260,000
WASHINGTON, Jan 27 (Reuters) – The U.S. economy recorded its strongest growth in nearly four decades in 2021 after the government injected trillions of dollars in COVID-19 aid, and is seen going from forward despite the headwinds of the pandemic, as well as the strained supply chains that inflation.
A surge in gross domestic product in the fourth quarter, as businesses replenished depleted inventories to meet strong demand for goods, was the latest boost. Last year’s robust growth reported by the Commerce Department on Thursday supports the Federal Reserve’s pivot to an interest rate hike in March.
Fed Chairman Jerome Powell told reporters on Wednesday after a two-day policy meeting that “the economy no longer needs high and sustained levels of monetary policy support” and that “it will soon be appropriate to raise” the rates. Read more
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“While Omicron will lead to weaker growth in the first quarter, business should bounce back nicely once the latest pandemic wave subsides and supply chain issues ease,” said Sal Guatieri, Senior Economist at BMO Capital Markets in Toronto.
“The Fed will need to be ‘humble and nimble’ as it navigates underlying economic strength, worsening labor shortages and stubbornly high inflation.”
The economy grew 5.7% in 2021, the strongest since 1984, as the government provided nearly $6 trillion in pandemic relief. It contracted 3.4% in 2020, the biggest drop in 74 years.
It was the first time in 20 years that the US economy grew faster than the Chinese economy.
President Joe Biden quickly took credit for the stunning performance, which he said was “no accident”.
Biden’s popularity is plummeting amid a stalled national economic agenda after Congress failed to pass his signature $1.75 trillion Build Back Better legislation.
“We are finally building an American economy for the 21st century, and I urge Congress to build on that momentum by passing legislation to make America more competitive, strengthen our supply chains, strengthen our manufacturing and innovation, invest in our families and clean energy, and reduce kitchen table costs,” Biden said in a statement.
Gross domestic product grew at an annualized rate of 6.9% in the fourth quarter, the government said in its preliminary GDP estimate. This followed a 2.3% growth pace in the third quarter.
Growth is 3.1% higher than its pre-pandemic level.
Economists polled by Reuters had forecast GDP growth at a rate of 5.5%.
Momentum, however, faded in December amid a surge of COVID-19 infections, fueled by the Omicron variant, which helped cut expenses and disrupt activity in factories and businesses. service companies. But there are signs that infections have peaked, which could lead to increased demand for services by spring.
Investment in inventories increased at a rate of $173.5 billion, contributing 4.90 percentage points to GDP growth, the most since the third quarter of 2020. Businesses were reducing inventories since the first quarter of 2021.
Spending has shifted during the pandemic towards goods from services, a boom in demand that has put pressure on supply chains. Excluding inventories, GDP grew at a moderate pace of 1.9%.
Stocks on Wall Street were trading higher. The dollar appreciated against a basket of currencies. US Treasury yields fell.
Some economists viewed the modest growth in so-called final sales as a sign that the economy was about to slow significantly, especially if not all of the inventory accumulation was expected. They were also concerned that rate hikes as well as cuts in government support, particularly the loss of the childcare tax credit, would hurt demand.
So far, inventory-to-sales ratios remain low by historical standards.
“Fed policymakers will have to be extra careful when threading the needle when raising interest rates, because every other Federal Reserve in history has raised interest rates too high and pushed them back down. economy,” said Christopher Rupkey, chief economist at FWDBONDS in New York. York.
Growth in the last quarter was also lifted by a jump in consumer spending in October before pulling back significantly as Omicron raged. Consumer spending, which accounts for more than two-thirds of economic activity, rose at a 3.3% rate after growing at a 2.0% pace in the third quarter.
A decline in motor vehicle purchases, which are in short supply due to a global chip shortage, was offset by increased spending on healthcare as well as member clubs, sports centers, parks, theaters and museums.
Inflation rose to a rate of 6.9%, the fastest since the second quarter of 1981, well above the Fed’s 2% target. This translated into a drop in income available to households at a rate of 5.8%, which also limited consumer spending.
Yet households remained protected by huge savings, which amounted to $1.34 trillion. Wages jumped 8.9% before adjusting for inflation, reflecting a labor market that is experiencing an acute shortage of workers, with 10.6 million job openings at the end of November.
Although the labor market pulled back in early January with the surge in Omicron, it is at or near its peak. A separate Labor Department report on Thursday showed initial jobless claims fell by 30,000 to a seasonally adjusted 260,000 in the week ended Jan. 22.
There were steep declines in claims in Illinois, Kentucky, Texas, New Jersey, New York, and Pennsylvania.
Support for GDP growth in the last quarter also came from a rebound in business capital spending. But government spending has plummeted at the federal, state and local levels.
Trade made no contribution after dampening GDP growth for five consecutive quarters, while investment in housing construction contracted for a third consecutive quarter. The area is constrained by expensive building materials, which has resulted in a record backlog of homes to be built.
Despite the difficulties in the economy at the start of the year, most economists believe that good fortune will prevail. Growth estimates for this year exceed 4%.
“This year may well be an even better year for the economy,” said Scott Hoyt, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Growth will slow and monthly job gains will be below last year’s high rates. Nonetheless, the economy should be close to full employment and inflation close to the Fed’s target by the end of the year. of the year.”
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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci
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