Warehouse workers deal with inventory stacked up to the ceiling at the ABT Electronics Facility in Glenview, Illinois, December 4, 2018. REUTERS Richa Naidu File Photo
WASHINGTON, Jan 27, Reuters -- U.S. economic growth likely accelerated in the fourth quarter as businesses replenished inventories to meet strong demand for goods, helping the nation to log its best performance in nearly four decades in 2021, due to the nation's recovery in nearly four decades in nearly four decades in nearly four decades.
The growth last year was fueled by massive fiscal stimulator and very low interest rates. The momentum appears to have faded by December due to an onslaught of COVID 19 infections, fueled by the Omicron variant, which has contributed to undercutting spending as well as disrupting activity at factories and services businesses.
The Commerce Department's advance fourth-quarter gross domestic product report would support the Federal Reserve's pivot toward raising interest rates in March, and diminishing the prospects of more spending by President Joe Biden's government, according to the Commerce Department's advance fourth-quarter gross domestic product report on Thursday.
After a two-day policy meeting on Wednesday, Fed Chair Jerome Powell told reporters that the economy no longer needs high levels of monetary policy support, and that it will soon be appropriate to raise rates. The growth was boosted by inventory accumulation, said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. We spent so much money in the past. The Fed supported the effort and the Biden administration over-stimulated the economy. The Reuters survey of economists showed that GDP growth likely increased at a 5.5% annualized rate last quarter. That would be a jump from the 2.3% pace in the third quarter.
The estimates ranged from as low as a 3.4% rate to as high as a 7.0% rate. The survey was conducted before the December release of data showing a record goods trade deficit and a surge in retail inventories.
The strong retail inventory accumulation led to economists to raise their GDP growth estimates to as high as a 7.5% rate.
Growth is estimated to be at 5.6% for all of 2021, which would be the strongest since 1984. The economy contracted by 3.4% in 2020, the biggest drop in 74 years.
The rebound in growth last year could give some cheer to President Biden whose popularity is falling amid a stalled domestic economic agenda after the U.S. Congress failed to pass his signature on $1.75 trillion Build Back Better legislation.
The increase in GDP growth in the fourth quarter is expected to have been caused by inventory investment. In the first quarter of 2021, businesses had been drawing down inventories. Demanding supply chains pressured supply chains, because of the pandemic, spending moved to goods from services.
The inventories grew at a $167 billion rate last quarter, after adjusting for inflation, according to JPMorgan.
GDP growth was likely to increase at a rate of 2.5%, excluding inventories.
The growth last quarter was lifted by a jump in consumer spending in October before it fell considerably as Omicron spread across the country. The shortage of vehicles and other goods has hampered consumer spending, which accounts for more than two-thirds of economic activity. Consumer spending was hampered by reduced household purchasing power, with inflation way above the Fed's 2% target at the end of the fourth quarter.
Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania, said Omicron is doing a lot of damage to the economy this quarter. The worst of this wave's hit to growth may be behind us, if daily confirmed COVID 19 cases are declining in the U.S. The labor market has been impacted by the Omicron-driven outbreak of infections, with first-time applications for unemployment benefits plummeted to a three-month high in mid-January.
According to a survey by the Labor Department, initial claims for jobless benefits dropped 26,000 to a seasonally adjusted 260,000 during the week ending January 22, according to a report by the Labor Department.
After being held back in the July-September period by shortages of trucks, business spending on equipment is expected to have rebounded, as well as support to GDP growth last quarter.
Trade was probably a drag on GDP growth for a sixth straight quarter, while the housing market regained its footing after contracting for two consecutive quarters. The sector has been constrained by expensive building materials, which has resulted in a record backlog of homes yet to be built.
The economy is expected to improve this year despite the anticipated soft patch in the first quarter due to challenges from the never-ending pandemic, the worst inflation in decades, supply chain bottlenecks and upcoming interest rate increases.
Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina, said the economy is continuing to grow above its natural speed limit this year, despite still-solid demand, need to replenish severely depleted inventory levels and manufacturers' obligation to meet record levels of backlogged orders.