In January, the US economy was heading through caseloads of Omicron variant, geopolitical chaos, and record-high inflation. The world's strongest economy concluded 2021 with another strong quarter of thriving growth, delivering to strengthen the fastest full-year recovery since Ronald Reagan's presidency as the country continued to recover from the worst of the economic harm caused by the coronavirus outbreak. In 2021, the country's GDP (total output of goods and services)increased by 5.7%. It was the highest calendar-year increase since a 7.2% surge following a prior recession in 1984. The economy finished the year by growing at an unexpectedly impressive annual rate of 6.9% in the fourth quarter. Last year's expansion was fueled by a moderate increase in consumer expenditure and a significant increase in private investment, driven by expansionary fiscal and monetary policy. Moving forward, the economy is anticipated to continue expanding this year, albeit at a slower pace, despite being squeezed by inflation and still gripped by COVID-19 caseloads. Many economists have reduced their forecasts for the first quarter of2022, owing to the impact of the Omicron variant. Furthermore, the Federal Reserve stated in its last meeting that it intends to hike interest rates numerous times this year in order to combat the highest inflation in nearly four decades. These rate hikes will make borrowing more expensive, dragging economic growth this year.
Low Retail sales and sluggish Manufacturing activity in December were offset by robust personal consumption and private expenditure. The economy began to show signs of tiredness late last year. For example, retail sales declined 1.9% in December. According to the Institute for Supply Management's manufacturing index, manufacturing slowed in December to its lowest level in 11 months. Despite poor December retail sales numbers, consumer spending aided fourth-quarter economic growth as Americans began their Christmas shopping early due to concerns that supply chain snarls would result in bare store shelves. Consumer spending increased at a 3.3% annual rate in the last three months of 2021. Private investment, on the other hand, increased by 32%. Furthermore, in December, labor market circumstances improved. The unemployment rate fell to 3.9%, compared to the market forecast of 4.1% and previous figures of 4.2%. Furthermore, labor force participation grew to 61.9%, adding more workers to the force than was previously predicted at 61.7%.
During the end of last year, a strong resurgence in demand piqued supply chain problems and spiked inflation to a four-decade high. The rise in demand was so strong that it caught businesses off guard. Many businesses struggled to find enough goods and staff to meet a sudden rise in consumer demand. With so many individuals now working remotely, the market witnessed shortages of home goods inventories, appliances to athletic goods, and electronic equipment, which were increasingly problematic. Additionally, the ongoing shortage of computer chips kept auto dealers short of vehicles. Factories, ports, and freight yards were overburdened, amid clogged supply chains. Inflation began to pick up speed. Consumer prices have risen by 7% in the last year, the biggest year-on-year increase since 1982, raising flags across policymakers and market participants. Food, energy, (commodities), and automobiles(chips) were among the goods where prices picked up the fastest. In the near term, one issue that may have a detrimental impact on spending is the US economy skyrocketed inflation. According to the most recent report, core personal consumption expenditures, the Federal Reserve's preferred inflation gauge, increased by 4.9% on an annualized basis in the fourth quarter, up from 4.6% the previous quarter.
The Fed focused beyond Omicron effects and signaled rate hikes in the near term. On the Fed's most recent meeting, Chairman Jay Powell stated that he expected some slowdown in the economy as a result of the Omicron wave, which began to ripple through the U.S. in late December, although the spokesman flagged that the impacts would be temporary and should fade away as coronavirus constraints ease. The Fed has ignored Omicron's worries and signaled its determination to tighten monetary policy in March as part of its measures to combat persisting inflation. With markets expecting at least four rate hikes this year and the Fed swiftly decreasing its balance sheet, there are concerns that aggressive tightening may undermine the economy momentum.
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