By Dean Baker
GDP grew at a 6.9 percent annual rate in the fourth quarter, somewhat faster than had generally been expected. However, inventory accumulations were the main factor driving growth. Final demand grew at just a 1.9 percent annual rate, as inventories added 4.9 percentage points to the quarter’s growth. GDP is now 3.1 percent above its level in the fourth quarter of 2019, putting it just slightly below the pre-pandemic trend growth path.
Inventories Grow at Rapid Pace
Inventories shrank in the first three quarters of 2021, they rose at an annual rate of $173.5 billion in the fourth quarter. With the demand for goods slowing, both because consumption of durables will be somewhat satiated (people who bought a refrigerator in 2021 don’t buy another one in 2022) and people are switching back to services, there should be less stress on supply chains in the months ahead.
Consumption Growth Was Modest, Saving Rate Still High
Consumption grew at a 3.3 percent annual rate in the quarter. Services far outpaced goods, growing at a 4.7 percent rate, compared to 1.6 percent rate for durable goods. Consumption of nondurable goods actually fell by 0.1 percent.
Service consumption is now less than 0.4 percent below its pre-pandemic level (goods consumption is 15.4 percent higher). Consumption of many services is above the pre-pandemic level, notably restaurant sales, which are 2.4 percent higher; although hotels are still down 14.9 percent.
Consumption in some more narrow categories is still seriously depressed. Real spending on nursing home services is 9.1 percent below pre-pandemic level, child care is down by 11.4 percent, and dental services are down by 13.2 percent.
Work-related expenses have seen the sharpest drop. Spending on hair salons is down 44.7 percent. Spending on road transportation is down 26.0 percent. Spending on laundry is down 12.0 percent. If a large number of people continue to be able to work from home after the pandemic, consumption in these categories will not bounce back to pre-pandemic levels.
At 7.4 Percent, Saving Rate is at Pre-Pandemic Level
One of the big questions about the economy’s prospects going forward is whether people will spend down the savings they accumulated during the pandemic, due to the various government payments and simply being unable to spend in many areas because of the pandemic. It appears that people are still not spending from their savings to any substantial extent.
The 7.4 percent saving rate for the fourth quarter is almost identical to the 7.5 percent average for the three years prior to the pandemic. And, since saving rates are almost revised upward, it may ultimately turn out to be slightly higher. This should reduce fears of the economy overheating.
Investment in Intellectual Products Grows 10.6 Percent in Quarter, Overall Up 2.0 Percent
Investment in intellectual products maintained its strong growth in the quarter rising at a 10.6 percent annual rate. It is now 14.7 percent above its pre-pandemic level. Investment in equipment grew at a modest 0.8 percent annual rate after declining at a 2.3 percent rate in the third quarter. Purchases of transportation equipment, likely a supply chain issue, was the big factor holding back investment in this category. Nonetheless, equipment investment is still 5.6 percent above its pre-pandemic level.
Overall non-residential investment is just 2.3 percent above its pre-pandemic level, as investment in structures is down by 22.8 percent. This reflects the reduced need for office and retail space, as more people work from home and buy online.
Housing Falls for Third Consecutive Quarter
Residential construction fell at a 0.8 percent rate, its third consecutive decline. This likely reflects supply chain problems for lumber and other construction materials. Nonetheless, residential construction was still 13.2 percent above its pre-pandemic level in the quarter.
State and Local Government Spending Fell in the Fourth Quarter
Spending by state and local governments fell at a 2.2 percent annual rate in the fourth quarter. Their spending is now just 0.6 percent above the pre-pandemic level. This is somewhat surprising since most cities and states are reasonably flush with money right now due to the American Recovery Act. This could partially reflect difficulties in hiring. Presumably, spending growth will turn around in 2022.
Export Growth Surges in Quarter
Exports grew at a 24.5 percent annual rate, fast enough to offset a 17.7 percent growth in imports to leave the trade balance little changed. Exports are now 6.0 percent below their pre-pandemic level, with the decline being fully attributable to an 18.1 percent drop in service exports (largely foreign travel). Goods exports are up 0.8 percent. Imports are up by 9.9 percent, with imports of services down 6.9 percent.
More Modest Growth Ahead, Inflation Slowing
With the economy nearly back to its pre-pandemic trend growth path, we are likely to see more normal rates of growth in 2022; although inventory swings (and pandemic surges) could produce some surprises. The sharp rise in inventories in the fourth quarter means that supply chain issues in many areas are being overcome, although it will be some time before the problems are fully resolved.
Insofar as shortages were putting upward pressure on prices (the core Personal Consumption Expenditures rose at a 4.9 percent rate in the quarter), we should see some relief in the months ahead. If people are not spending down their pandemic savings, as seems to be the case, there should be less concern about inflationary pressures from excess demand going forward.