2021: Setting the Stage for a Return to Normal?

  • Q4 GDP increased 6.9 percent, beats expectations.
  • Full-year GDP increased 5.7 percent, the best since 1984.
  • But inflation soars to 7 percent; Fed chair Powell signals interest rate hikes as early as March.

By Joe Higgins, Quest 4 Quality

The best way to judge the performance of an economy is in the increase of gross domestic product, or GDP.

GDP is defined as the amount of goods and services produced over the course of any given year. It also includes investments by businesses, government purchases, and the yearly trade balance.

Our economy is split between goods and services, with goods making up about 25 percent of our economic base and services accounting for the other 75 percent. Over the past ten years, GDP growth in America has rarely been above 3 percent, and over the last 35 years has never exceeded 6 percent.

In 2021, we struggled through the Delta and Omicron viruses. As a result, the expectations for growth were greatly diminished. However, in the last quarter of 2021, GDP increased 6.9 percent on an annualized basis, as reported by the U.S. Commerce Department. Expectations for the quarter by economists were for 5.5 percent.

It was an exciting report, as gains came from consumer spending, significant acquisitions of inventories, and exports, while losses were driven by a cutback in government spending and imports. As a result, the trade imbalance accelerated in the quarter as American ports were busy with inbound freight from foreign countries.

The full year ended with GDP up 5.7 percent. This was the most robust full-year GDP growth since 1984 and more than double the increases we experienced over the last decade. American consumers, beset by COVID-19 and rapidly rising prices, helped the U.S. economy and drove the GDP through an increase in spending and retail sales. It was an extraordinary result given that consumers were struggling with the rapid spread of the virus, inflation rising to 7 percent, and job resignation rates through the roof.

The resultant increase in GDP occurred due to the fast response to the needs of our citizens, who were most impacted by the difficulties we faced during the last 24 months. The stimulus money in the 2020 CARES Act and the American Rescue Plan Act of 2021 totaled over $4 trillion and was paid out to those in need. These two stimulus programs propped up the economy over the worst part of the pandemic and drove inflation.

Inflation soared last year to 7 percent, but Americans didn’t cut back on their purchases; instead, the overwhelming demand for goods and a marked slowdown in services caused significant disruptions in the supply chains. The ports were jammed, workers called in sick, and quit rates hit an all-time high. The unprecedented demand and the shortage of goods filled the economy with uncertainty.

After the Fed meeting last week, Fed Chair Jerome Powell signaled that economic growth would slow in the first half of the year, consumers would see an interest rate hike in March, and the Fed would decelerate bond purchases. Although I believe the Federal Reserve was too late with these interest rate moves, they should be sufficient to slow down the economy and begin to bring inflation under control.

To be fair, the Fed had limited wiggle room last year, given its dual mandates of low inflation and full employment. In 2021 the government needed to support job growth with the stimulus that prompted spending, caused demand to soar, and ultimately caused inflation. If the Fed began raising interest rates a year ago, it would have impacted job growth and slowed economic production, which could have started a move towards deflation. If we had followed that plan, our recovery would have looked like the period after the Great Recession in 2009.

This year, while Powell considers the economy to be strong, he did acknowledge that we face some concerning issues that leave the U.S on uncertain footing as we move through 2022.

Much of what happens next depends on the strength of the virus. If the pandemic cools and we get back to some level of normalcy, the pressure on durable goods will decline, supply chains will have time to heal, and this will eventually reduce pricing.

The bottom line is that we will see good growth this year, but not what we experienced in 2021. Confidence will rise once the virus subsides, spending will increase as consumers get back to normal, unemployment will fall to 3.3 percent, and GDP will be up over 3 percent. Consumers will take more vacations, stay at hotels, and dine in restaurants as the service side of our economy makes a comeback.

Still, with the historic rise in home equity, the remodeling business, including furniture, electronics, and appliances, will be robust.

Joe Higgins is a 43-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YourSource News contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.