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The US economy ended last year on a rebound as consumer spending and business investment helped ease the stubborn grip of the pandemic.
Gross domestic product — the country’s broadest measure of the production of goods and services — rose 1.7 percent on an inflation-adjusted basis in the final three months of 2021, the Commerce Department said on Thursday. For the full year, the economy grew 5.7 percent, the fastest annual growth since 1984.
The economic recovery was largely driven by vaccination efforts, easy Federal Reserve borrowing conditions and a new round of government support for households and businesses.
The past year “has been marked 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 both Congress and the Fed.
To a certain extent, the fourth quarter was a breathing space between corona waves. It started when the Delta variant wore off and Omicron’s effects were only felt in the last few weeks. The question now is whether the coming months can bring an even more complete recovery – and how much the accompanying higher prices will be overshadowed.
Economists expect Omicron to weigh on the economy in January and much of February. The initial momentum of government stimulus is expected to fade and the Fed plans to use its policy tools in the coming months to try to contain inflation by gradually raising the cost of borrowing.
The International Monetary Fund this week cut its US growth forecast for 2022 by 1.2 percentage points to 4 percent, citing tighter Fed policy and an expected halt to further stimulus spending by Congress. But that increase would still exceed the annual average from 2010 to 2019. And most economists say activity should pick up as spring approaches.
One encouraging sign in the fourth-quarter data is that corporate restocking accounted for more than half of profits, the second-biggest quarterly contribution since the last three months of 1987. This shows companies’ confidence that they’re selling can store them — as well as “at least an incremental improvement in supply chains,” said Jane Oates, assistant secretary of labor during the Obama administration and president of WorkingNation, a nonprofit group focused on employment issues.
The supply chain problems emerged last spring as demand, particularly for consumer goods, overwhelmed supply networks already disrupted by the pandemic.
import prices were 10.4 percent higher in December than a year earlier, according to the Labor Department. Many companies large and small are preparing for supply chain issues that will last beyond the summer, keeping pressure on prices.
At a press briefing on Wednesday, Fed Chair Jerome H. Powell acknowledged that “shortages and supply constraints are limiting how quickly production can respond to higher demand in the near term” and that “these problems are larger and lasting longer than anticipated.”
It’s an unwelcome sign for workers, whose wages have grown at the fastest pace in decades while their spending power has been eroded by higher-priced goods. Consumer prices rose 7 percent year-to-date through December.
As the pandemic took hold nearly two years ago, Washington policymakers decided to over-aid rather than under-aid — and some analysts say the tradeoffs of that decision are becoming apparent.
“It’s about what you prioritize,” says 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-related activity disruptions in 2020. As recently as February, the Congressional Budget Office predicted it could take until 2024 to reach the current unemployment rate of 3.9 percent, down from a peak of 14.7 percent in April 2020.
But many Americans who worked before the pandemic have left the job market — at least for now — and employers struggling to fill jobs have raised wages, a factor cited for spurring inflation.
Real disposable personal income fell 5.8 percent in the fourth quarter, and the personal savings rate — the percentage of total disposable income that goes into savings each month — fell to 7.4 percent from 9.5 percent in the third quarter.
This could be a worrying sign of financial precarity for lower-income families, as many have relied on the cash reserves built up during the pandemic to cushion against price spikes.
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One noticeable change in the pandemic is that consumers have moved to spend more on goods as eating, travel and other personal experiences have been restricted. Fourth quarter numbers showed the ongoing trend back towards a more conventional equilibrium.
Spending on goods rose just 0.5 percent – after falling in the third quarter – while spending on services rose 4.7 percent.
Availability was part of the equation. As companies compete to get to the top of the supply chain for the parts that make up their finished products, material shortages for hard-to-source components like computer chips remain a headache.
Still, the average business owner “sees a very strong environment right now,” said Oren Klachkin, senior economist for US industry and regional research at Oxford Economics. “They want to increase their investment because they want to meet that demand — and they have every reason to invest.”
Jeff Somple, the president of Mack Molding — an Arlington, Vt. contract manufacturer that makes custom components and complete products for other companies — said the business has been profitable and even booming. But staffing shortages and nagging supply hurdles have meant its factories’ production capacity can’t keep up. As a result, his team has often had to turn down orders.
“Our #1 challenge every day is to find the parts we need to make the products,” be it raw resin or a PCB from China, and then “strive to find enough people” to participate in the.” assembly work, he said.
The company has raised the starting salary to around $15 an hour and the median wage to around $20 an hour. That didn’t stop a rush of employees from quitting or changing careers as business thrived.
Some prefer the option of working from home, Mr Somple said, or the option of more flexible working hours than those offered on a factory floor. Of those who stayed, many were absent because of the spread of Covid-19 infections this winter: “It’s kind of a whac-a-mole here when we come in on Monday and ask, ‘Who’s coming into work and what are there parts emerging that we can incorporate into the products we make?’”
For printed circuit board quotes, the lead time – the number of days from placing an order until these items arrive at a plant – was in some cases as much as a year. “We may have 30 different suppliers that we depend on to make a product,” he explained. “So if a supplier has a problem and lets us down, you know we might shut down an entire production line that 20 people are working on because we can’t get that one thing.”
Leisure, hospitality, travel and other related service-oriented sectors are bracing for the worst of winter and the remnants of the Omicron rise as they prepare for what businesses and consumers are hoping is a brisk return to something normal.
Southwest Airlines said on Thursday that ticket sales were weaker because of the Omicron variant and customer cancellations were increasing. The airline expects losses in January and February. But Bob Jordan, Southwest’s executive vice president, who takes over as chief executive next week, said in a statement that he expects to report profits in March and for the rest of the year. “The worst seems to be behind us,” he said.
Ben Casselman and Niraj Chokshi contributed reporting.