US Economy Grew by Forecast-Beating 6.9 Percent in 4th Quarter

An employee works at the Kirsh Foundry in Beaver Dam, Wis., on April 12, 2018. (Timothy Aeppel/Reuters File Photo)

The U.S. economy expanded at an annualized pace of 6.9 percent in the final quarter of 2021, sharply higher than consensus forecasts of 5.5 percent, fueled in part by a buildup of inventories and solid consumer spending.

The economic growth figures, released Jan. 27, also show that U.S. gross domestic product (GDP) for the full year 2021 grew by 5.7 percent, marking the strongest whole-year performance since 1984. The U.S. economy contracted by 3.4 percent in the pandemic year of 2020.

“The economy is getting closer to something like normal, but service consumption is still depressed. Investment is very strong, state and local spending is lagging,” Dean Baker, a senior economist at the think-tank Center for Economic and Policy Research, said in a tweet.

Increases in private inventory investment, personal consumption expenditures, exports, and nonresidential fixed investment drove GDP higher. These gains were partly offset by decreases in federal, state, and local government spending.

A rise in imports subtracted 2.43 percentage points from the quarterly GDP calculation and 1.87 percentage points from the annual figure. The import surge sent the U.S. trade deficit in goods in December to a monthly record high of $101 billion, while bringing the total shortfall for all of 2021 to over $1 trillion, also a historic first.

Inventories, which rose at an annual rate of $173.5 billion in the fourth quarter, added 4.9 percentage points to the fourth-quarter GDP growth number.

“Strong buildup in inventories indicates that supply problems are lessening,” Baker wrote in a follow-on tweet. “This should put downward pressure on prices in the months ahead.”

Surging inflation, which in the year through December hit a multi-decade high of 7 percent, has prompted the Federal Reserve to accelerate the pace of dialing back its loose monetary settings. Fed Chair Jerome Powell struck a hawkish note on Jan. 26, telling reporters after a two-day policy meeting that officials are looking at March to begin boosting interest rates in a bid to tame runaway prices.

He also made clear the Fed intends to increase rates several times this year.

“Booming,” is how Ian Shepherdson, chief economist at Pantheon Macroeconomics, described economic growth in the final quarter, adding that the Fed should seize the opportunity and “hike as fast as possible.”

Personal consumption rose 3.3 percent in the final quarter and 7.9 percent for all of 2021, Commerce Department figures show.

Still gripped by the pandemic and squeezed by inflation, the U.S. economy is expected to slow this year.

The International Monetary Fund recently downgraded its outlook for U.S. GDP growth to 4 percent for all of 2022, a sharp downgrade from the October forecast of 5.2 percent.