The U.S. economy is showing signs of bouncing back from the pandemic recession with gusto. Gross domestic product climbed by 5.7% last year — the highest annual growth rate in more than three decades. There are a few reasons for strong growth and a few more reasons it probably won’t continue this year.
The last time the GDP grew at about this rate, President Ronald Reagan was in office. GDP growth in the last quarter of 2021 was 6.9%.
“This is a rip-roaring economy,” said Laura Veldkamp, an economics professor at Columbia Business School. She pointed out that GDP includes the cost of goods, so some of that rise is because of inflation.
“But not all of it, even when you take out the effect of rising prices, this still looks like a really rapid rate of economic growth,” Veldkamp said.
Veldkamp does expect the rip-roaring growth to mellow out once the Fed acts on interest rates.
“I also expect the Federal Reserve to come in and, you know, pull away the punch bowl just as the party gets started,” she said.
When interest rates go up, consumers are less likely to spend, and that can slow GDP growth.
Much of last year’s growth was related to unique circumstances brought on by the pandemic. Ethan Harris with Bank of America Global Research pointed to an excess of retail inventory at the end of the year — retailers overstocked for the holidays.
“You had a very front-loaded holiday shopping season, which kind of ran out of gas,” Harris said.
Some of that inventory is just sitting on shelves. Many other products are still not getting to stores because of manufacturing and transportation delays.
Tim Mahedy, a senior economist at KPMG, gave a personal example. “We just had our second child, and we’ve been looking for an Ikea crib for nine months,” he said.
Every time Mahedy and his wife get an “in stock” notification, they race to the closest Ikea in the San Francisco Bay area to try to get the crib.
“And we have failed,” he said.
Even though Mahedy has money to spend, he can’t find the product he wants. Like others whose wages are rising in some sectors, supply shortages are hampering his spending.
“There’s additional income on the left-hand side. How much do the supply disruptions affect the availability of goods?” he said.
That’ll be the GDP storyline to follow in 2022, Mahedy said.