The U.S. economy ended last year with a flourish as consumer spending and business investment helped loosen the pandemic’s stubborn grip.
Gross domestic product — the broadest measure of the nation’s production of goods and services — expanded by 1.7 percent in the final three months of 2021 after adjusting for inflation, the Commerce Department announced Thursday. For the full year, the economy grew 5.7 percent, the largest annual increase since 1984.
The economic lift was largely provided by vaccination efforts, cheap credit conditions put in place by the Federal Reserve and a fresh round of federal aid to households and businesses.
Last year “was defined by very strong policy support,” said Julia Coronado, a former Federal Reserve economist and a professor of finance at the University of Texas at Austin. “And 2022 is going to be defined by the removal of that support,” by Congress and the Fed alike.
The fourth quarter was, to some extent, a respite between coronavirus waves. It began as the Delta variant was easing, and the impact of Omicron began to be felt only in the final weeks. Now the question is whether the coming months can deliver an even fuller recovery — and how much of a shadow will be cast by the higher prices that have come with it.
Economists expect Omicron to be a drag on the economy in January and much of February. The initial momentum provided by government stimulus is projected to diminish, and the Fed is planning to use its policy tools in the coming months to try to rein in inflation by gradually raising borrowing costs.
The International Monetary Fund, citing tighter Fed policy and an anticipated halt to any further stimulus spending by Congress, reduced its U.S. growth forecast for 2022 this week by 1.2 percentage points, to 4 percent. But that increase would still outpace the annual average from 2010 to 2019. And most economists say activity should pick up as spring approaches.
One promising sign in the fourth-quarter data is that the rebuilding of inventory among businesses made up more than half of the gains, the second-largest quarterly contribution since the last three months of 1987. That indicates confidence among businesses that they can sell what they are stocking — as well as “at least incremental improvement in supply chains,” said Jane Oates, an assistant labor secretary during the Obama administration and the president of WorkingNation, a nonprofit group focused on employment issues.
The supply chain problems emerged last spring when demand, especially for consumer goods, overstrained supply networks already discombobulated by the pandemic.
Import prices were 10.4 percent higher in December than a year earlier, according to the Labor Department. Many businesses, large and small, are preparing for supply chain issues to stretch beyond the summer, maintaining pressure on prices.
At a news conference on Wednesday, Jerome H. Powell, the Fed chair, conceded that “bottlenecks and supply constraints are limiting how quickly production can respond to higher demand in the near term” and that “these problems have been larger and longer-lasting than anticipated.”
That is an unwelcome sign for workers whose wages have grown at the fastest pace in decades, while their purchasing power has been dented by costlier goods. Consumer prices increased 7 percent in the year through December.
When the pandemic took hold almost two years ago, policymakers in Washington decided to err on the side of delivering too much aid rather than too little — and some analysts say the trade-offs of that decision are becoming evident.
“It’s all about what you prioritize,” said Allison Schrager, an economist and senior fellow at the Manhattan Institute, a conservative think tank. If there had been less stimulus, she said, “inflation wouldn’t be as bad as it is.”
The economy has recovered almost 19 million of the 22 million jobs lost near the peak of virus-induced suspensions in activity in 2020. As recently as last February, the Congressional Budget Office predicted that it might take until 2024 to reach the current unemployment rate of 3.9 percent, down from a peak of 14.7 percent in April 2020.
But many Americans who were working before the pandemic have left the labor market — at least for now — and employers struggling to fill jobs have increased wages, one factor cited for fueling inflation.
Real disposable personal income decreased by 5.8 percent in the fourth quarter, and the personal saving rate — the percentage of overall disposable income that goes into savings each month — dropped to 7.4 percent from 9.5 percent in the third quarter.
That could be a worrying sign of financial precarity for families with lower incomes, since many have been relying on cash reserves built up during the pandemic to cushion them against price spikes.
Percent change in
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before the pandemic
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One striking change in the pandemic is that with dining, travel and other in-person experiences curtailed, consumers shifted to spending more heavily on goods. The fourth-quarter figures showed the continuing swing back toward a more conventional balance.
Spending on goods was up only 0.5 percent — after declining in the third quarter — while outlays on services increased 4.7 percent.
Availability was part of the equation. With businesses outbidding one another to get to the front of the line for supply parts that make up their finished products, materials shortages for hard-to-source components, such as computer chips, remain a headache.
Even so, the average business owner “sees a very strong environment right now,” said Oren Klachkin, the lead economist for U.S. industry and regional research at Oxford Economics. “They want to ramp up investment because they want to meet that demand — and they have every reason to invest.”
Jeff Somple, the president of Mack Molding — a contract manufacturer in Arlington, Vt., that creates custom components and full products for other companies — said business had been profitable, booming even. But staffing and nagging supply hurdles have meant his factories’ production capacity can’t keep up. His team has often had to turn down orders as a result.
“Every day, our No. 1 challenge is chasing down the parts that we need to make the products,” whether that’s raw resin or a circuit board from China, and then “scrambling to find enough people” to work on assembly, he said.
The company has raised entry-level pay to about $15 an hour and average wages to roughly $20 an hour. That didn’t stop a rush of employees from quitting or switching careers just as business was picking up.
Some preferred work-from-home opportunities, Mr. Somple said, or the option for more flexible hours than those on offer at a factory floor. Of those who have remained, many have been absent because of the spread of Covid-19 infections this winter: “It’s kind of Whac-a-Mole here when we come in on Monday and we ask, ‘Who’s showing up to work and what parts are showing up that we can put into the products that we make?’”
When bidding for circuit boards, the lead time — the number of days from when an order is placed to when those items arrive at a plant — has been a year in some cases. “We might have 30 different suppliers that we’re depending on to make one product,” he explained. “So if one supplier has a problem and lets us down, you know we could be shutting down an entire production line that has 20 people working on it because we can’t get this one thing.”
Leisure, hospitality, travel and other related service-based sectors are bracing for the worst of winter and what’s left of the Omicron surge, while gearing up for what businesses and consumers hope will be a lively return to something resembling normal.
Southwest Airlines said on Thursday that ticket sales were weaker and customer cancellations were on the rise because of the Omicron variant. The airline expects losses in January and February. But Bob Jordan, Southwest’s executive vice president, who takes over as chief executive next week, said in a statement that he expected to report profits in March and throughout the rest of the year. “The worst appears to be behind us,” he said.
Ben Casselman and Niraj Chokshi contributed reporting.