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GDP growth has its strongest year in nearly four decades

January 27, 2022 Blog 2 min read
Authors:
Jim Baird Wealth Management
The U.S. economy bounced back strongly as economic growth accelerated in the fourth quarter, boosted by inventory rebuilding and strong consumer spending.

GDP QoQ (annualized % change) - historyThe economy grew at a robust pace in the fourth quarter, with initial estimates for Q4 GDP growth coming in at 6.9% — well above expectations of 5.3%. The strong finish to the year lifted GDP growth for 2021 to 5.7% — the strongest year for the U.S. economy in nearly four decades.

The strength of the economy last year stood in stark contrast to the collapse in activity in early 2020, which also speaks to the success of both the public and private sector in quickly adapting to the unprecedented challenges created by the COVID-19 pandemic.

That being said, potential headwinds still exist, as global pandemic-related risks persist. Labor conditions in the United States remain exceptionally tight, while constraints on production and kinks in the global supply chain are proving more difficult to fix than policymakers had anticipated a year ago.

The most notable near-term challenge lies in surging prices, which continued to accelerate by virtually any measure in recent months. The fact that real growth in consumption was as strong as it was despite rising prices reflects the resilience of the consumer sector, supported by robust wage growth, rising asset prices, and a considerable savings stockpile accumulated since early 2020.

Consumer spending rebounded to 3.3% in Q4, led by strong spending in the service sector. Given the outsized spending on goods earlier in the recovery as many consumers were still hesitant to travel and engage in in-person activities, improvement in service sector spending is a welcome development for a large part of the U.S. economy. It also provides a barometer for consumer confidence and assessment of public health risk.

The greatest lift came from the continued rebuilding of depleted inventories, which accounted for about 70% of the Q4 advance. Given the range of businesses that ran lean throughout last year, signs of an easing in supply shortages will be welcomed by consumers and should help to alleviate inflationary pressures over time.

Notably, the Q4 GDP figures don’t fully capture the impact of the omicron variant. The surge in infections in December and early January prompted a slowdown, particularly in activities that involve physical proximity to others. The combination of actual illness and cautionary quarantines vexed employers, as millions of American workers have been temporarily sidelined over the past month. The effects are expected to be apparent in January data, reflecting the drag from those disruptions and serving up a poignant reminder that the pandemic isn’t over.

The bottom line? The economy capped its strongest year in decades with its best quarter since the initial reopening surge. A broad-based inventory rebuild and improving demand for services sector were key contributors. Near-term results may soften as a result of the omicron wave, but the economy should remain on a good footing to reaccelerate in the coming months.

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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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