In a powerful rebound from 2020, when the economy contracted by 3.4 percent — its worst result since 1946 — 2021′s strong growth created a record 6.4 million jobs. But it also brought a host of complications, helping fuel the highest inflation in 40 years and creating supply chain snarls as consumers hungry for products overwhelmed the global delivery system. To beat back rising prices, the Federal Reserve is now shifting its strategy and preparing for interest rate hikes this year, convinced it has given enough support to help the labor market and now must keep the economy from overheating further.
Earlier in the year, economists worried that global supply chain problems would keep businesses from being able to fully stock shelves. But a rush by companies in the final months of 2021 to bolster their inventories ultimately drove GDP much higher.
Firms such as Georgia’s Agilysys, which specializes in hotel property-management and point-of-sale systems, are building up inventories to guard against supply-chain disruptions and logistical challenges. Agilysys has increased its inventory levels by 175 percent in the past nine months to “mitigate supply chain risk,” Chief Financial Officer Dave Wood said on a recent earnings call.
But even that silver lining comes with the reminder of how parts of the economy remain extremely disrupted.
“We’re hitting on all cylinders producing goods, and that’s good,” said Ben Herzon, executive director at IHS Markit. “But it’s also bad, because the economy wasn’t really set up to produce goods at the level that it’s producing now. That’s one of the reasons we’re seeing some of the problems on the supply side.”
Economists expect the economy to grow 3.9 percent in 2022, according to a survey by Wolters Kluwer’s Blue Chip Economic Indicators. That would represent a second year consecutive year of strong growth, well above what Fed policymakers estimate is the economy’s long-run 1.8 percent growth rate.
But the 2022 economy will have much less support behind it, as the Fed raises interest rates and Congress appears to have little appetite for more covid-related stimulus. The hope is that households and consumers will be secure enough to keep the economy pumping, even as the pandemic dictates so much about the path ahead.
“While we have reached the end of pandemic era fiscal and monetary policy the pandemic is not yet over,” Joe Brusuelas, chief economist at RSM, wrote in an analyst note Thursday morning. “The rate hikes that are now clearly in play will show up in the final quarter of the year slowing growth. The U.S. consumer and investment in the housing sector will continue to be the primary engine of growth as the economy transitions away from pandemic era fiscal and monetary support.”
The economy has made tremendous strides since being gutted by the coronavirus pandemic in the spring of 2020. The Fed has only recently mounted an aggressive effort to unwind its pandemic-era interventions. And the Biden administration often touts last year’s gains as a vote of confidence for Democrats’ sprawling stimulus measures, which juiced the broader economy and cushioned peoples’ pocketbooks.
“This is no accident,” President Biden said in a statement Thursday morning, referring to the GDP report. “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.”
U.S. stocks surged Thursday after days of wild swings. The Dow Jones industrial average was up nearly 600 points, or 1.7 percent, shortly after the opening bell. The S&P 500 and tech-heavy Nasdaq rose 1.7 and 1.5 percent, respectively. The ongoing volatility suggests Wednesday’s remarks by Federal Reserve Chair Jerome H. Powell did not go far enough to calm investors about a series of rate hikes expected this year.
GDP, which measures the value of all goods and services produced in the economy, is typically reported after adjusting for inflation. Without inflation, growth in 2021 would have been 10.0 percent, meaning some of the year’s growth was offset by rising prices.
Still, Herzon said, the overwhelming stimulus that went into the economy in 2021 helped increase the spending power of many families despite rising prices.
“Inflation had some stiff competition from the federal government,” Herzon said.
Car prices nonetheless weighed on the economy for much of the year. The cost of new and used models has helped drive inflation throughout the pandemic, as a shortage of semiconductors squeezed the global supply chain.
Thursday’s GDP report noted that private inventory investment from motor vehicle dealers was a leading contributor to growth in the final three months of 2021. But that doesn’t mean that dealerships have been able to fill up their lots and catch up with consumer demand. Rather, Jonathan Smoke, chief economist at Cox Automotive, noted that the models themselves have gone up in value as car prices surge higher and higher.
“The real driver of the retail inventory measurement was the dollar value, driven by new vehicle price inflation,” Smoke said. “This does not mean that real unit inventories are up substantially — they are not.”
Since the 2020 recession, sports- and recreational-vehicle sales have consistently been among the economy’s brightest spots. But similar supply-chain issues have dogged the sector. Minnesota-based Polaris, best known for its off-road vehicles, reported retail sales fell by about a quarter in North America in the final three months of the year. Inventories at its dealerships are down 70 percent from their pre-pandemic levels.
“Predicting when the supply chain pressures ease remain difficult, but our most current view is that modest improvement should start to materialize sometime in the third quarter of 2022,” said Polaris chief executive Michael Speetzen said on a recent earnings call, latter adding that while sales are strong so far this year, semiconductor shortages continue to weigh on production.
Omicron began to rip through the labor market at the end of 2021, with December registering record-high levels of sick leave, according to Liz Wilke, principal economist at Gusto, a payroll and benefits provider. But the wave is ebbing. The share of employees taking sick time remains elevated but has fallen by almost a third over the past two weeks.
In a sign that consumers are starting to return to old habits, separate data shows that after almost two years of sweeping cuts and slow growth, museums and libraries are returning to pre-pandemic spending levels. In Muskogee, Okla., the Five Civilized Tribes Museum saw gift-shop sales grow in 2021, thanks to sales of books and crafts, even as attendance fell slightly.
The museum saw only a quarter as many school groups in 2021 as it gets in a typical year, said Sean Barney, its executive director. Walk-in visitor traffic slumped as gas prices soared and fewer people lit out to explore eastern Oklahoma’s Indian Country.
But school groups are starting to come back, and the museum is in good shape after pandemic-era shutdowns allowed the museum to renovate exhibits on Native art and life after the Trail of Tears. Barney said he’s optimistic that 2022 will represent a full return to normal.
Aaron Gregg contributed to this report.
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