US Economy Accelerated in Fourth Quarter, But Outlook Turned Cloudy
Karl Schamotta - Chief Market Strategist
The American economy expanded at a 6.9 percent annualized rate in the final quarter of last year, beating market expectations for a 5.7 percent gain. This marked the strongest calendar year growth since 1984, and amounted to the fastest post-recession recovery in at least five decades. The acceleration was helped by a bump in consumer spending and exports - but a huge jump in inventories played the biggest role.
Household consumption climbed: Despite a coronavirus-driven slowdown in December, consumer outlays grew 3.3 percent in the quarter, up from a 2 percent gain in the prior quarter. Spending shifted from goods to services for a second consecutive quarter.
Overall demand strengthened: Real final sales to domestic purchasers - a measure that removes trade and inventories, and is used by economists to estimate the robustness of domestic demand - rose 1.9 percent in the fourth quarter. This marked an acceleration from the 1.3 percent increase recorded for the prior three months.
Inventories played a worrisomely-important role: Inventories added 4.9 percentage points to overall growth, but with backlogs impacting ports and intermodal transportation corridors, and Omicron-related labour shortages hitting nodes across the supply chain, some of this was likely undesired. To some extent, stockpile drawdowns are now likely to exert negative drag on gross domestic product measures in the first quarter.
Government spending tumbled: In a sign of things to come, a decline in fiscal spending took a -0.5 percent negative toll on overall growth. This effect is expected to grow in 2022 as stimulus efforts fade.
Separately, durable goods fell more than expected: Commitments for goods meant to last more than three years dropped -0.9 percent in December, more than the -0.6 percent expected in markets, as aircraft and communications equipment orders weakened. Core capital goods orders - often seen as a proxy for business investment - stabilized at 0.3 percent .
The dollar inched further up: After yesterday’s Federal Reserve press conference, in which Jerome Powell effectively abandoned the central bank’s forward guidance-based framework, markets expect benchmark interest rates to rise from 0.25 percent to 1.5 percent by the end of the year. The dollar is up almost 1.5 percent on the week.
What’s next: Tomorrow’s personal income and spending data should provide further insight into the handoff from the fourth quarter, and could have significant ramifications for currency markets.