January 27, 2022
The U.S. economy outperformed expectations in the fourth quarter. Gross domestic product (GDP) grew at a 6.9% annualized rate according to the initial Bureau of Economic Analysis’ estimate, clearing the Bloomberg consensus forecast of 5.5% by a healthy margin. The pace picked up nicely from the 2.3% growth rate in the third quarter plagued by the Delta variant.
As you can see in our LPL Chart of the Day, the biggest driver of the upside surprise during the quarter was 4.9 points of inventories. The good news is companies were optimistic enough about the outlook to restock. Perhaps even better news is that companies were able to build those inventories amid shortages and supply chain bottlenecks. Less good, however, is that extra inventory building last quarter likely translates into a much smaller build in the first quarter.
“The strong GDP number for Q4 is encouraging, no doubt,” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “But last quarter’s big inventory contribution won’t recur while the drag from Omicron continues, setting up a potentially soft first quarter.”
As is often the case, consumer spending also provided a lift to GDP. High inflation did not prevent shoppers from spending this holiday season, as consumer spending rose 3.2% annualized during the quarter (remember these GDP numbers are expressed in real terms and are adjusted for inflation). The contribution to GDP by consumer spending increased from 1.4% in Q3 to 2.3% in Q4. Business investment maintained its tepid pace, growing 2% annualized after 1.7% growth in Q3. Shortages and supply chain issues were clearly at play.
The solid overall growth rate in a challenging environment is impressive. However, the inflation data that came with this report was less reassuring. The GDP deflator rose 6.9% in the quarter, well above the consensus forecast of 6.0%, while the core personal consumption expenditure (PCE) price index, which excludes food and energy, remained elevated but in line with expectations at 4.9%. This data certainly does little to reduce the inflation anxiety for markets, nor will it make the Federal Reserve regret leaving the door open to four, or possibly more, interest rate hikes this year.
The Omicron variant has already introduced some downside risk to our 2022 GDP growth forecast of 4-4.5%. The less bullish inventory picture as 2022 began adds a bit more potential downside risk—though it got us to 5.7% GDP growth for full year 2021, fastest since 1984. So while we are not changing our GDP forecast for this year at this time so we can see more data, the next move is more likely to be down than up. That said, coming off such a strong 2021, and considering the pre-pandemic trend around 2%, something in the high 3% range would still represent solid growth for the U.S. economy.
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