US economy grew 5.7% in 2021

WASHINGTON: After contracting in 2020, US economic growth saw its biggest increase since 1984 with a rebound to 5.7 per cent in 2021, the second year of the Covid-19 pandemic, the government reported.

But the hit from the Omicron variant of the virus held down the recovery in the final quarter of the year, when GDP grew 6.9 per cent, the Commerce Department reported.

Prices accelerated during the year as well, peaking in the October-December period with a 6.5 per cent surge in the personal consumption expenditures (PCE) price index — the measure which the Federal Reserve focuses on. That was the biggest increase in 40 years.

For the full year, inflation rose 3.9 per cent, according to the data.

Excluding volatile food and energy prices which have increased sharply in the year, the core PCE price index rose 3.3 per cent in 2021, and 4.9 per cent in the fourth quarter.

Earlier, Fed Chair Jerome Powell told reporters after a two-day policy meeting that “the economy no longer needs sustained high levels of monetary policy support,” and that “it will soon be appropriate to raise” rates.

The sharp rebound in growth last year could offer some cheer for President Joe Biden whose popularity is falling amid a stalled domestic economic agenda after the US Congress failed to pass his signature $1.75 trillion Build Back Better legislation. It, however, diminishes prospects of more money from the government.

Inventory investment accounted for the bulk of the increase in GDP growth in the fourth quarter. Businesses had been drawing down inventories since the first quarter of 2021. Spending shifted during the pandemic to goods from services, a demand boom that pressured supply chains.

Growth last quarter was also lifted by a jump in consumer spending in October before retreating considerably as Omicron spread across the country. Consumer spending, which accounts for more than two-thirds of economic activity, has been hampered by shortages of motor vehicles and other goods. A global chip shortage is hurting production. Reduced household purchasing power, with inflation way above the Fed’s 2 per cent target, also hindered consumer spending at the tail end of the fourth quarter.