GDP grew at an annual rate of 6.9% in the fourth quarter, slightly faster than generally expected. However, inventory accumulations were the main driver of growth. Final demand grew at an annual rate of just 1.9%, as inventories added 4.9 percentage points to growth in the quarter. GDP is now 3.1% above its level in the fourth quarter of 2019, putting it slightly below the pre-pandemic trend growth path.
Stocks are growing at a rapid pace
Inventories fell in the first three quarters of 2021, growing at an annual rate of $173.5 billion in the fourth quarter. With demand for goods slowing, both because consumption of durable goods will be somewhat satiated (people who bought a refrigerator in 2021 are not buying another in 2022) and people are turning to services, there should be less pressure on supply chains in the coming months.
Consumption growth has been modest, the savings rate still high
Consumption increased at an annual rate of 3.3% during the quarter. Services far outpaced goods, with growth of 4.7%, versus 1.6% for durable goods. Consumption of non-durable goods actually fell 0.1%.
Consumption of services is now less than 0.4% lower than its pre-pandemic level (consumption of goods is 15.4% higher). Consumption of many services is above pre-pandemic levels, including restaurant sales, which are 2.4% higher; although hotels are still down 14.9%.
Consumption in some narrower categories is still heavily depressed. Actual spending on nursing home services is 9.1% below pre-pandemic levels, child care services are down 11.4% and dental services are down 13.2 %.
Work-related expenses saw the biggest drop. Spending in hair salons fell 44.7%. Spending on road transportation fell by 26.0%. Laundry expenses decreased by 12.0%. If large numbers of people continue to be able to work from home after the pandemic, consumption in these categories will not rebound to pre-pandemic levels.
At 7.4%, the savings rate is at pre-pandemic levels
One of the big questions about the outlook for the economy going forward is whether people will spend the savings they’ve accumulated during the pandemic, due to various government payments and simply not being able to spend. in many areas because of the pandemic. It seems that people are still not spending their savings substantially.
The savings rate of 7.4% for the fourth quarter is almost identical to the average of 7.5% for the three years before the pandemic. And, as the savings rate is almost revised upwards, it could ultimately turn out to be a little higher. This should reduce fears of an overheated economy.
Investment in intellectual products increases 10.6% in the quarter, up 2.0% overall
Investment in intellectual products maintained its strong growth during the quarter with an annual rate of 10.6%. It is now 14.7% above its pre-pandemic level. Equipment investment grew at a modest 0.8% annual rate after declining at a 2.3% rate in the third quarter. Transportation equipment purchases, likely a supply chain issue, were the main factor holding back investment in this category. Nevertheless, investment in equipment is still 5.6% higher than its pre-pandemic level.
Overall non-residential investment is only 2.3% above its pre-pandemic level, while investment in structures has fallen by 22.8%. This reflects reduced needs for office and retail space as more people work from home and shop online.
Housing falls for the third consecutive quarter
Residential construction fell at a rate of 0.8%, its third consecutive decline. This likely reflects supply chain issues for lumber and other building materials. Nonetheless, residential construction was still 13.2% above its pre-pandemic level in the quarter.
State and local government spending fell in the fourth quarter
State and local government spending fell at an annual rate of 2.2% in the fourth quarter. Their spending is now only 0.6% above the pre-pandemic level. This is somewhat surprising since most cities and states are reasonably strapped for cash due to the American Recovery Act. This could partly reflect difficulties in hiring. Likely, spending growth will pick up in 2022.
Rise in export growth in the quarter
Exports grew at an annual rate of 24.5%, fast enough to offset a 17.7% growth in imports and leave the trade balance little changed. Exports are now 6.0% below their pre-pandemic level, with the decline entirely attributable to an 18.1% decline in services exports (mainly outbound travel). Goods exports rose 0.8%. Imports are up 9.9%, imports of services down 6.9%.
More modest growth ahead, slowing inflation
With the economy almost back to its pre-pandemic trend growth trajectory, we are likely to see more normal growth rates in 2022; although stock fluctuations (and pandemic outbreaks) might come as a surprise. The sharp increase in inventory in the fourth quarter means that supply chain issues in many areas are being overcome, although it will be some time before the issues are fully resolved.
To the extent that shortages were putting upward pressure on prices (basic personal consumption expenditure grew at a rate of 4.9% in the quarter), we should see some relief in the coming months. . If people aren’t spending their pandemic savings, as appears to be the case, inflationary pressures from excess demand should be less of a concern in the future.