The Department of Commerce recently provided its latest glimpse on the state of the U.S. economy. In the October-December fourth quarter, the economy grew at an annualized rate of 6.9%. This exceeded Wall Street’s forecast of 5.7% and was well above the third quarter’s pace of just 2.3%. For the full-year 2021, the nation’s rate of economic growth was 5.7%, the fastest annual rate since 1984.
The continued strength in the U.S. economy was somewhat expected. Since the initial fallout from the global pandemic in March and April 2020, the American economy has been quick to recover. Our post-pandemic recovery has been fueled in large part by the introduction of vaccines and the more than $5 trillion in government stimulus money. Unfortunately, an inherent consequence of this massive stimulus money is rising inflation, which now stands at 7%, a 40-year high.
Though celebrated by Wall Street, the surprisingly robust fourth quarter economic report comes with a bit of a caveat. Historically, the key driver of the U.S. economy is consumer spending, which accounts for more than two-thirds of our nation’s economic growth. In the fourth quarter, the consumer spending component certainly impressed, rising at an annualized rate of 3.3%. But the main source of the fourth quarter’s high-octane 6.9% growth actually came from a premature surge in private inventory levels.
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Private inventories represent the volume of physical goods owned by private businesses. For much of 2021, merchants faced depleted inventories of goods to sell caused by the ongoing supply chain disruptions and labor shortage. In the fourth quarter — the heart of the retail holiday shopping season — businesses worked overtime to refill their empty shelves and warehouses to satisfy the spike in consumer demand. Consequently, private inventories increased by a massive $224.7 billion, the biggest quarterly gain in American history.
Due to the ongoing delays in receiving goods, the fourth quarter surge in inventories wasn’t expected until the first and second quarters of 2022. In effect, much of the predicted economic growth in the first half of the year was essentially pulled forward into the fourth quarter. Accordingly, economic growth for 2022 has since been downgraded. For the full-year 2022, the projected pace of economic growth has been reduced from roughly 4% down to around 2.3-2.7%. This is slightly above the historical average rate of 2.2%.
With the tailwinds of the economic recovery starting to fade, 2022 will be a much more challenging year. The easy gains — the free ride — is quickly coming to an end. Going forward, any growth in America’s economy will now be much tougher to come by.
Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.
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