Comment on US GDP report for Q4 2021

US Real Gross Domestic Product grew by 6.9 percent (annualized) during the fourth quarter of 2021, above the consensus forecast of 5.5 percent* and The Conference Board’s forecast of 6.0 percent. This quarterly annualized growth rate was up from the 2.3 percent rate seen in Q3 2021, when the COVID-19 Delta variant weighed on the US economy. While this rebound is welcome, it will likely be temporary. We expect GDP growth in Q1 2022 to slow to 2.2 percent due to the impact of the COVID-19 Omicron variant.

The improvement in economic activity recorded in Q4 2021 was primarily driven by growth in inventory investment, and consumer spending. Changes in private inventories, a highly volatile component of GDP, rose by USD 173 billion** from the previous quarter and contributed 4.9 percent to total GDP growth. This spike was partially the result of companies replenishing inventories that were depleted by earlier supply chain disruptions.  Thus, some of the strength reported in Q4 2021 economic activity is overstated while previous quarters understate activity. Personal consumption expenditures contributed 2.2 percent to overall GDP growth in Q4 2021 – with spending on services contributing 2.1 percent and spending on goods contributing 0.1 percent. Exports of goods and services grew at a robust 24.5 (annualized) percent while imports expanded by 17.7 percent. However, the net contribution from trade on GDP was zero percent. Finally, a contraction in government spending resulted in a contribution of -0.5 percent to economic growth for the quarter.

For the full year of 2021 US GDP growth rose to 5.7 percent year-over-year, vs. our forecast of 5.6 percent. This large annual gain follows the pandemic-induced contraction of -3.4 percent recorded in 2020. While the overall size of the US economy returned to pre-pandemic levels in Q1 2021, ample fiscal and monetary support fueled a rebound throughout much of last year. Looking ahead, we expect US GDP to grow by 3.5 percent in 2022 and 2.9 percent in 2023 as economic expansion begins to slow to a more natural rate of growth.

Sizeable risks still weigh on our forecast. While the number of new cases of COVID-19 are on the decline there is still a risk that new variants may emerge that disrupt economic activity this year. Additionally, tight labor markets have helped drive inflation higher over the course 2021 – as wages rose rapidly and companies increased prices to offset these higher costs. If this trend continues a wage/price spiral may ensue that exacerbates the inflation problem. The Federal Reserve is signaling tighter monetary policy to address rising inflation, but will need to tread carefully as over-tightening may risk triggering a recession. On the upside, passage of the Build Back Better social and climate package remains a possibility in 2022. If passed, even a trimmed-down version of this legislation would serve to boost confidence and the economic trajectory.

* Survey conducted by the Wall Street Journal
** chained 2012 USD