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Economic Problems Lie Beneath Strong Numbers

The removal of fiscal and monetary stimulus will weigh on the economy this year, after it soared 6.9% in the fourth quarter.
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The economy ran hot in the fourth quarter, with annualized growth hitting 6.9%. That pushed growth for all of 2021 to 5.7%, the strongest since 1984.

But some problems surfaced behind the numbers. Most of the growth stemmed from companies increasing their inventories to deal with supply chain disruption. Excluding inventories, GDP expanded only 1.9%.

Consumer spending has pulled back from the torrid pace of the first half of 2021, rising 3.3% in the fourth quarter. Much of the strength came early in the quarter, as consumers rushed to do their holiday shopping while they knew goods were available. Earlier this month, the government reported that retail sales slid 1.9% in December.

“The headline 6.9% figure [for GDP] is probably a bit overly optimistic assessment of the underlying strength of demand,” Andrew Hunter, chief U.S. economist at Capital Economics research firm, told The Wall Street Journal.

“We do think it’s increasingly the case that the economy is essentially at or rapidly approaching that capacity-constrained, potential level…. The speed limit is lower now than it was before the pandemic.”

The omicron Covid variant has put a dent in the economy since it arrived last month. For example, durable goods orders slid 0.9% in December. Omicron “will slow growth in the beginning of the first quarter,” Constance L. Hunter, chief economist at KPMG, told The New York Times.

The Fed noted the pandemic’s impact on the economy in its policy statement this week. “The path of the economy continues to depend on the course of the virus,” the central bank said. While progress is being made on vaccinations, “risks to the economic outlook remain, including from new variants of the virus.”

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Two major pillars of support for the economy last year are going away this year: fiscal stimulus from the Federal government and monetary stimulus from the Federal Reserve.


Last year “was defined by very strong policy support,” Julia Coronado, a professor of finance at the University of Texas, told The Times. “And 2022 is going to be defined by the removal of that support.”

The pandemic programs putting cash in consumers’ pockets are largely over. And the Federal Reserve is poised to begin raising interest rates in March to fight raging inflation. Consumer prices soared 7% in the fourth quarter. And it’s not clear how quickly the Fed will be able to push inflation down.

“We have an expectation about the way the economy’s going to evolve but we’ve got to be in a position to address different outcomes, including the one where inflation remains higher,” Fed Chairman Jerome Powell said in a press conference after the Fed’s meeting Wednesday.

Supply chain woes also remain a risk. “Bottlenecks and supply constraints are

limiting how quickly production can respond to higher demand in the near term,” Powell said. “These problems have been larger and longer lasting than anticipated.”

IHS Markit economists forecast the economy will grow at just a 2% annualized rate in the first quarter, The Journal reports. IHS’ purchasing managers index slid to 50.8 this month from 57 in December.

Meanwhile, the International Monetary Fund this week cut its forecast for U.S. growth in full-year 2022 to 4% from 5.2% previously.