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The U.S. economy ended last year booming as consumer spending and business investment helped loosen the stubborn grip of the pandemic.
Gross domestic product – the broadest measure of the country’s output of goods and services – rose 1.7% in the last three months of 2021 after adjusting for inflation, the department said on Thursday. Trade. For the full year, the economy grew 5.7%, the biggest annual increase since 1984.
The economic boost has been largely provided by vaccination efforts, cheap credit conditions put in place by the Federal Reserve, and a new round of federal aid to households and businesses.
The past year “has been defined by very strong political support,” said Julia Coronado, a former Federal Reserve economist and professor of finance at the University of Texas at Austin. “And 2022 will be defined by the removal of that support,” by Congress and the Fed.
The fourth quarter was, to some extent, a respite from the waves of coronavirus. It started as the Delta variant waned, and Omicron’s impact only started to be felt in the last few weeks. Now the question is whether the coming months can offer an even fuller recovery – and what shadow will be cast by the higher prices that have accompanied 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 expected to wane and the Fed plans to use its policy tools over the next few months to try to control inflation by gradually raising borrowing costs.
The International Monetary Fund, citing tighter Fed policy and an early halt to any new stimulus spending by Congress, this week cut its 2022 U.S. growth forecast by 1.2 percentage points, to 4%. But that increase would still exceed the annual average from 2010 to 2019. And most economists say activity should pick up as spring approaches.
A promising sign in the fourth quarter data is that business restocking accounted for more than half of the gains, the second largest quarterly contribution since the last three months of 1987. This indicates that businesses are confident that they can sell whatever they want. they’re stockpiling — as well as “at least incremental improvement in supply chains,” said Jane Oates, assistant secretary of labor in the Obama administration and president of WorkingNation, a nonprofit group focused on labor issues. ‘use.
Supply chain issues surfaced last spring when demand, particularly for consumer goods, overloaded supply networks already disrupted by the pandemic.
Import prices were 10.4% higher in December than a year earlier, according to the Labor Department. Many companies large and small are preparing for supply chain issues to extend beyond the summer, keeping prices under pressure.
At a press conference on Wednesday, Jerome H. Powell, the Fed Chairman, acknowledged that “bottlenecks and supply constraints limit how quickly production can meet higher demand at term” and that “these problems have been more significant and more long-lasting”. provided that.
It’s an unwelcome sign for workers whose wages have risen at the fastest rate in decades as their purchasing power has been dented by more expensive goods. Consumer prices rose 7% in the year to December.
When the pandemic took hold nearly two years ago, policymakers in Washington decided to err on the side of providing too much aid rather than too little — and some analysts say the trade-offs of that decision are becoming apparent.
“It all depends on 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 nearly 19 million of the 22 million jobs lost near the peak of virus-induced business suspensions in 2020. As recently as February, the Congressional Budget Office predicted that it would take until 2024 to reach the current unemployment rate of 3.9%, up from a peak of 14.7% in April 2020.
But many Americans who were working before the pandemic have left the workforce — at least for now — and employers struggling to fill jobs have hiked wages, a factor cited for fueling inflation.
Real personal disposable income fell 5.8% in the fourth quarter and the personal savings rate – the percentage of overall disposable income that is spent on savings each month – fell to 7.4% from 9.5 % in the third trimester.
This could be a worrying sign of financial precariousness for low-income families, as many rely on cash reserves built up during the pandemic to protect them against price spikes.
Percentage change from
gross domestic product
Since the last trimester
before the pandemic
Percentage change from
gross domestic product
Since the last trimester before
A striking change in the pandemic is that with dining, travel and other in-person experiences reduced, consumers have started to spend more on goods. Fourth quarter figures showed the continued return to a more conventional balance.
Spending on goods rose just 0.5% – after declining in the third quarter – while spending on services rose 4.7%.
Availability was part of the equation. As companies outbid each other to get to the front of the pack to supply the parts that make up their finished products, material shortages for hard-to-find components, such as computer chips, remain a headache.
Even so, the average business owner “sees a very strong environment right now,” said Oren Klachkin, chief economist for US industry and regional research at Oxford Economics. “They want to increase investment because they want to meet that demand – and they have every reason to invest.”
Jeff Somple, president of Mack Molding — a contract manufacturer in Arlington, Vermont, that creates custom components and complete products for other companies — said the business has been profitable, even booming. But staffing and ongoing supply bottlenecks have prevented production capacity at its factories from keeping pace. His team often had to refuse orders.
“Every day, our #1 challenge is to source the parts we need to make the products,” whether it’s raw resin or a circuit board from China, and then “scramble to find enough people” to work on the assembly, he said. .
The company raised the entry-level salary to around $15 per hour and the average salary to around $20 per hour. That didn’t stop a rush of employees quitting or changing careers just as business picked up.
Some prefer work-from-home opportunities, Mr. Somple said, or the option of more flexible hours than those offered at a factory. Of those who stayed, many were absent due to the spread of Covid-19 infections this winter: “It’s a bit of a whac-a-mole here when we walk in on Mondays and ask, ‘Who shows up at the work and what parts appear that we can put into the products we make?”
When bidding for printed circuit boards, lead time – the number of days from the time an order is placed to the time these items arrive at the factory – has been one year in some cases. “We can count on 30 different suppliers to make a product,” he explained. “So if a supplier has a problem and lets us down, you know we could shut down a whole production line that has 20 people working there because we can’t get that one thing.”
Leisure, hospitality, travel and other service-related sectors are bracing for the worst of winter and what’s left of Omicron’s surge, while bracing for what businesses and consumers are hoping for to be an animated throwback to something resembling normal.
Southwest Airlines said Thursday that ticket sales were lower and customer cancellations were on the rise due to the Omicron variant. The airline expects losses in January and February. But Bob Jordan, executive vice president of Southwest, who will take over as chief executive next week, said in a statement that he expects to report profits in March and throughout the year. “The worst seems to be behind us,” he said.
Ben Casselman and Niraj Chokshi contributed report.