US economy grew 5.7% in 2021 in rebound from 2020 recession

Nation's GDP grew 6.9 per cent in final quarter of 2021

After contracting in 2020, US economic growth rebounded to 5. 7 per cent in 2021, the second year of the Covid-19 pandemic, the government reported. AFP
Powered by automated translation

The US economy grew last year at the fastest pace since Ronald Reagan's presidency in the 1980s, bouncing back with resilience from 2020's brief but devastating coronavirus recession.

The nation’s GDP — its total output of goods and services — expanded 5.7 per cent in 2021. It was the strongest calendar-year growth since a 7.2 per cent surge in 1984 after a previous recession. The economy ended the year by growing at an unexpectedly brisk 6.9 per cent annual pace from October through December as businesses replenished their inventories, the US Commerce Department reported on Thursday.

“It just goes to show that the US economy has learnt to adapt to the new variants and continues to produce,'' said Beth Ann Bovino, chief economist at Standard & Poor's Global Ratings.

Squeezed by inflation and still gripped by Covid-19 caseloads, the economy is expected to slow this year. Many economists have been downgrading their forecasts for the current January-March quarter, reflecting the impact of the Omicron variant. And for all of 2022, the International Monetary Fund has forecast that the nation’s GDP growth will slow to 4 per cent.

Many US businesses, especially restaurants, bars, hotels and entertainment venues, remain under pressure from the Omicron variant, which has kept millions of people hunkered down at home to avoid crowds. Consumer spending, the primary driver of the economy, may be further held back this year by the loss of government aid to households, which nurtured activity in 2020 and 2021 but has mainly expired.

What’s more, the Federal Reserve made clear on Wednesday that it plans to raise interest rates multiple times this year to battle the hottest inflation in nearly four decades. Those rate increases will make borrowing more expensive and perhaps slow the economy this year.

Growth last year was driven up by a 7.9 per cent surge in consumer spending and a 9.5 per cent increase in private investment. For the final three months of 2021, consumer spending rose at a more muted 3.3 per cent annual pace. But private investment rocketed 32 per cent higher, boosted by a surge in business inventories as companies stocked up to meet higher customer demand. Rising inventories, in fact, accounted for 71 per cent of the fourth-quarter growth.

The US supply chain backlog, explained

The US supply chain backlog, explained

Arising from the 2020 pandemic recession, a healthy rebound had been expected for 2021. The eruption of Covid-19 in March 2020 had led authorities to order lockdowns and businesses to abruptly shut down or reduce hours. The economy sank into a deep recession.

But super-low interest rates, huge infusions of government aid and, eventually, the widespread roll-out of vaccines revived the economy. Many consumers regained the confidence and financial wherewithal to go out and spend again.

The resurgence in demand was so robust that it caught businesses off guard. Many struggled to acquire enough supplies and workers to meet a swift increase in customer orders. With many people now working remotely, shortages became especially acute for goods ordered for homes. And with computer chips in especially short supply, car dealers were left desperately short of vehicles.

Factories, ports and freight yards were overwhelmed, and supply chains became ensnarled. Inflation began to accelerate. Over the past 12 months, consumer prices soared 7 per cent.

Late last year, the economy began to show signs of fatigue. Retail sales, for instance, fell 1.9 per cent in December. And manufacturing slowed in December to its lowest level in 11 months, the Institute for Supply Management’s manufacturing index showed.

Updated: January 27, 2022, 3:59 PM