The recovery was stronger than we thought last year. Here’s why it didn’t feel that way

US gross domestic product — the broadest measure of economic activity — grew at an annualized pace of 7% between October and December, just above the 6.9% that was first reported in January and in line with economists’ expectations.

The revisions came on the back of higher investments in housing and nonresidential items, like equipment and software. A rebuilding of inventories also helped bolster economic activity in the final three months of the year. State and local government spending was also higher, though all the increases were offset by slightly lower consumer spending than initially thought.

For the full year 2021, GDP growth was unchanged at 5.7%, according to Thursday’s report.

Overall, Americans spent willingly last year — which is good news for the economy. But economists are growing concerned about whether the shopping spree can continue. While the recovery was chugging along comfortably, Americans faced soaring prices and a new wave of infections and virus-mitigating restrictions spurred by the Omicron variant of the coronavirus.

Fourth quarter inflation stood at 6.3%, according to the price index tracking consumer spending, slightly less than the 6.5% initially reported. Stripping out food and energy costs, however, price hikes accelerated faster, with core inflation at 5% rather than the 4.9% first reported.

Inflation is still much higher than consumers, the Federal Reserve or the Biden administration would like.

The Fed hinted last month that it would raise interest rates at its March meeting in an effort to curb rising prices. The central bank started winding down its pandemic-era stimulus at the end of last year.
Current market expectations are set on a quarter percentage point rate hike next month, according to the CME FedWatch Tool.

“The economy faced disruptions from the Omicron variant into year-end, though this hit will be more evident in the [first quarter] data than today’s figures for [the fourth quarter],” said economists at Action Economics.

Even though the Omicron surge was relatively short lived and infection numbers are declining across the nation, economists believe the variant will leave a mark on consumer spending at the start of the year.

The recovery is widely expected to slow down this year as the economy returns to a pre-pandemic growth rate.

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