The American economy closed out last year on an upbeat note, finishing with a 6.9% growth rate in the fourth quarter on a seasonally adjusted annualized pace, according to Commerce Department data released on Thursday.
The omicron variant almost surely took the edge off growth during the final month of the year.
For the full year, growth advanced by 5.7%, the strongest rate since 1984. The increase was driven by a strong rebound in the household sector, inventory accumulation ahead of the traditional holiday shopping season and a robust increase in gross private investment.
Most encouraging was the 10.6% increase in productivity-enhancing intellectual property. Given the Federal Reserve’s pivot to raise interest rates to address rising inflation, increasing productivity is part of the growth elixir to dampen inflation on the margin as financial conditions tighten.
The omicron variant almost surely took the edge off growth during the final month of the year, and it is extracting a powerful toll on overall activity in the first quarter of this year.
Despite the gaudy 6.9% increase in the final quarter of last year, the U.S. economy will do well to eke out a barely-there 1.5% rate in the current quarter.
Given the Federal Reserve’s recent shift, a deceleration will become part of the conversation. But in our estimation, the central bank will look right through the current slowdown and will embark on the rate-hike portion of its policy normalization program at its March meeting despite what is going to be a weak quarter of growth to kick off the year.
Beneath the headline
Household consumption advanced by 3.3% and accounted for 2.25% of the 6.9% overall growth rate. Gross private investment jumped by 32% on the quarter following the 12.4% pace previously. Fixed investment advanced by 1.3%, outlays on equipment increased by 0.8% while investment in structures declined by 11.4%. Overall nonresidential investment increased by 2%.
Exports increased by 24.5%, while imports increased by 17.7%. Government consumption declined by 2.9% to close out the year. The final quarter of the year had a large increase in inventory accumulation of $173.5 billion following three straight quarterly declines, which is a function of modest improvement in supply chains and shipping in the final quarter of the year.
Alternative metrics of growth point to the impact of inflation and the overall composition of growth, which was tilted toward inventories, consumption and productivity-enhancing investment.
Nominal GDP increased by 14.3% and, as one would expect given the surge in inflation, real final sales advanced by 1.9%. Gross domestic purchases advanced by 6.7% while final sales to private domestic purchasers increased by 2.8%.
The takeaway
While we have reached the end of pandemic-era fiscal and monetary policy, the pandemic is not over. Growth finished last year on a strong note and unemployment is likely to fall below 3.5% by the end of this year.
While we expect a strong rebound in midyear growth following the first-quarter slowdown, the rate hikes that are now in play will show up in the final quarter of the year, slowing the economy.
Consumers and investment in the housing sector will continue to be the primary engine of growth as the economy transitions away from pandemic-era fiscal and monetary support.
We expect growth to arrive near 4% this year when all is said and done and then move back toward the long-term 1.7% path in the coming years.
