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  28 Jan 2022, 09:49

US economy grew 5.7% in 2021, but Omicron hit looms

  WASHINGTON, Jan 28, 2022 (BSS/AFP) - The world's largest economy staged a solid recovery last year as it grew at the fastest pace since 1984, but damage from the Omicron variant of Covid-19 is imminent.
 
   Surging prices continue to pose a challenge, as inflation picked up speed in the final three months of the pandemic's second year, according to official data released Thursday.
 
   That threatens to dampen the consumer demand that has underpinned the recovery, while shortages and supply chain snarls continue to create headaches for businesses, and for President Joe Biden's efforts to return the country to normal.
 
   After the downturn in 2020, US GDP expanded by 5.7 percent last year, the Commerce Department said in its latest quarterly report.
 
   In the October-November period when Omicron was spreading, GDP grew 6.9 percent, the data showed. While that topped expectations, economists warn the figure was inflated by businesses' attempts to rebuild depleted inventories.
 
   "The upside surprise came largely from a surge in inventories and the details aren't as strong as the headline would suggest," said Kathy Bostjancic of Oxford Economics.
 
   "What's more, beneath the headline GDP print, the handoff to 2022 is weak, with consumer spending retrenching in December and Omicron dampening economic activity," she said in an analysis.
 
   Ian Shepherdson of Pantheon Macroeconomics agreed, saying the start of the year looks grim: "Our tentative (first quarter) GDP forecast right now is zero."
 
   Biden, whose signature social spending bill is stalled in Congress, cheered the report, highlighting "the fastest economic growth in nearly four decades, along with the greatest year of job growth in American history."
 
   And, he said, "for the first time in 20 years, our economy grew faster than China's."
 
   China's growth slowed to four percent in the fourth quarter, according to official data released last week.
 
   "This is no accident," Biden said. "My economic strategy is creating good jobs for Americans, rebuilding our manufacturing, and strengthening our supply chains here at home to help make our companies more competitive."
 
   - Inflation on the rise -
 
   Ongoing supply bottlenecks and scarcity of key components combined with strong demand for goods fueled by generous government aid have created a perfect storm of inflationary pressures that have undercut Biden's approval among American voters.
 
   Prices accelerated during the year, peaking in the October-December period with a 6.5 percent surge in the personal consumption expenditures (PCE) price index -- the measure the Federal Reserve focuses on. That was the biggest increase in 40 years.
 
   For the full year, inflation rose 3.9 percent, according to the data, still far above the Fed's two percent goal.
 
   Excluding volatile food and energy prices which have increased sharply in the year, the core PCE price index rose 3.3 percent in 2021, and 4.9 percent in the fourth quarter.
 
   The Federal Reserve on Wednesday issued a clear signal that it plans to begin raising interest rates in March to tamp down inflation, but that also could restrain growth next year.
 
   Dana Peterson, chief economist at the Conference Board, a research organization, said she expects the Fed to raise the benchmark borrowing rate four or five times this year.
 
   While families have seen their savings boosted during the pandemic, including through government measures like the child tax credit, others "already are feeling squeezed by higher prices."
 
   But Peterson told reporters growth should bounce back in the second quarter and even with multiple rate increases, the Fed's interest rate would still be only 1.25 percent.
 
   "That's still very accommodative, but certainly constructive towards addressing these inflationary pressures," she said.
 
   - Easing labor impact? -
 
   Financial markets have boomed due to the Fed's easy money policies, and they did not like the hawkish policy pivot by the central bank. On Thursday, they closed lower again, with the S&P 500 now down nearly 10 percent from its peak in November.
 
   Labor shortages are another challenge for businesses, especially as the highly-infectious Omicron variant spreads rapidly.
 
   Data released Thursday showed new initial claims for unemployment benefits dropped last week, falling 30,000 to 260,000, which could be an indication the pandemic is loosening its grip, economists said.
 
   "A partial easing of labor and supply constraints through 2022 will allow businesses to ramp up production to meet strong current demand and continue to replenish depleted inventories, which will add to GDP in coming quarters," said Mickey Levy of Berenberg Capital Markets.
 

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