What’s more, the Federal Reserve made clear Wednesday that it plans to raise interest rates multiple times this year to battle the hottest inflation in nearly four decades. Those rate increases will make borrowing more expensive and perhaps slow the economy this year.
Growth last year was driven up by a 7.9 percent surge in consumer spending and a 9.5 percent increase in private investment. For the final three months of 2021, consumer spending rose at a more muted 3.3 percent annual pace. But private investment rocketed 32 percent higher.
Arising from the 2020 pandemic recession, a healthy rebound had been expected for 2021. GDP had shrunk 3.4 percent in 2020, the steepest full-year drop since an 11.6 percent plunge in 1946, when the nation was demobilizing after World War II. The eruption of Covid in March 2020 had led authorities to order lockdowns and businesses to abruptly shut down or reduce hours. Employers slashed a staggering 22 million jobs. The economy sank into a deep recession.
But super-low interest rates, huge infusions of government aid — including $1,400 checks to most households — and, eventually, the widespread rollout of vaccines revived the economy. Many consumers regained the confidence and financial wherewithal to go out and spend again.
The resurgence in demand was so robust, in fact, that it caught businesses off guard. Many struggled to acquire enough supplies and workers to meet a swift increase in customer orders. With many people now working remotely, shortages became especially acute for goods ordered for homes, from appliances to sporting goods to electronic equipment. And with computer chips in especially short supply, auto dealers were left desperately short of vehicles.
Factories, ports and freight yards were overwhelmed, and supply chains became ensnarled. Inflation began to accelerate. Over the past 12 months, consumer prices soared 7 percent — the fastest year-over-year inflation since 1982. Food, energy and autos were among the items whose prices soared the most.
Late last year, the economy began to show signs of fatigue. Retail sales, for instance, fell 1.9 percent in December. And manufacturing slowed in December to its lowest level in 11 months, according to the Institute for Supply Management’s manufacturing index.