Even as the U.S. economy grew at its fastest pace in decades in 2021, the recovery has more recently flashed troubling warning signs, with soaring inflation, whipsawing financial markets and slowing consumer spending complicating the rebound.
That strong reading still masks pressure from the omicron coronavirus variant that began sweeping through the nation late last year. This variant has left a swift and discernible imprint on retail sales, inflation and even new claims for jobless benefits.
But while head winds are expected to curtail U.S. economic growth early this year, economists generally agree that the pandemic’s impacts will fade by the second half of 2022 and won’t pull the nation back into another recession.
“Omicron will certainly show up in the GDP numbers, but the economy will bounce back quickly,” said Jason Furman, an economics professor at Harvard University who served as an economic adviser during the Obama administration. “It’s like a hurricane that scrambles the data for a bit.”
Overall, the economy has made sweeping strides since it was gutted by the coronavirus pandemic in the spring of 2020. For the full year of 2021, the U.S. economy grew 5.7 percent, the fastest yearly clip since 1984, and a marked rebound from 2020, when the economy contracted by 3.4 percent — its worst result since 1946.
The Biden administration on Thursday touted those recent gains as a vote of confidence for Democrats’ sprawling stimulus measures, which bolstered the broader economy and cushioned peoples’ pocketbooks.
“This is no accident,” President Biden said in a statement Thursday, referring to the GDP report. “My economic strategy is creating good jobs for Americans, rebuilding our manufacturing, and strengthening our supply chains here at home to help make our companies more competitive.”
Still, the economic challenges ahead are formidable. Widespread inflation, and uncertainty about how forcefully the Fed would move to halt it, has sent markets tumbling into a frenzy and created new headaches for the Biden administration, which has pledged to elevate tackling high prices as a key part of its policy agenda.
Inflation — which at 7 percent is at its highest level in four decades — is wiping out wage gains by raising the cost of basics such as food, gas and rent. Critics have been quick to pounce on Biden and the Federal Reserve for being too slow to act. And industry experts say recurring supply chain bottlenecks and omicron-related factory shutdowns are likely to prolong the crisis. Volkswagen and Toyota this month temporarily shut down some manufacturing facilities in China following covid outbreaks and lockdowns, which economists say could lead to further disruptions and even higher prices for vehicles, which are already up 12 percent from a year ago.
On Wednesday, Federal Reserve Chair Jerome H. Powell said Fed officials are encouraged by the strong labor market and signaled that the Fed would begin raising interest rates in March, in an effort to tamp down on inflation.
“Fortunately, health experts are finding that the omicron variant has not been as virulent as previous strains of the virus and they expect that cases will drop off rapidly,” he said, explaining why Fed officials believe the economy is ready for interest rate hikes. “If the wave passes quickly, the economic effects should, as well, and we would see a return to strong growth.”
Indeed, policymakers and economists expect three or more interest rate hikes to rein in inflation by later this year. The Fed has said it expects inflation to fall to 2.6 percent by the end of 2022, mirroring projections by professional forecasters.
In the meantime, major financial market indexes are all down so far in 2022, and swinging wildly this week. The Dow Jones industrial average was up around 400 points midday after closing down on Wednesday. But analysts, who have long noted that the rapid pandemic-era run-up was unsustainable, say that recent volatility is an overdue correction after months of unbridled growth.
“The Fed kept rates so low, so long, that it led to excessive risk-taking in the markets,” said Mickey Levy, chief Americas economist for Berenberg Capital Markets. “This is just an inevitable washing out.”
Yet many businesses say a strong return to growth also hinges on their ability to get — and keep — workers. The highly transmissible omicron variant has left many workplaces short-staffed as employees fall ill with the virus. In recent weeks, nearly 9 million Americans weren’t working because they had covid or were caring for someone who did, according to the Census Bureau’s latest Household Pulse Survey. Many businesses, including national chains such as Walmart, Starbucks and CVS, reduced store hours or temporarily closed some locations because so many workers were out sick.
But economists and business owners say there are already signs that the omicron variant has run its course in many parts of the country, allowing workplaces and child-care centers to reopen at full capacity.
When Christian Albertson saw omicron descending onto the Bay Area in late December, he reacted quickly, laying off all 40 workers at his Marin County restaurant and shutting down operations until the spring. It didn’t make financial sense, he said, to pay staff and buy food if his restaurant, Monk’s Kettle, would remain empty.
But, he stressed, the closure is only temporary.
“We know that any time the virus picks up, people stay home,” he said. “Closing down is certainly a hit, but we’re hoping this is going to last about two months. It’s going to be fast and furious, and then we’ll open back up.”
The omicron variant is just one piece of the slowing economic recovery. Broader concerns about economic uncertainty and diminished spending power are prompting consumers, businesses and investors to pull back, said Joe LaVorgna, chief Americas economist at Natixis and a former Trump White House economic adviser.
“Last year was a boom year: Everything rallied, everything went up,” he said. “But there was always a caveat, which was that 2022 would be worse.”
Historically, he said, strong expansions tend to be followed by periods of softening activity. “When you have 6 percent growth one year, that usually gets cut in half the next,” LaVorgna said.
On top of that, the raging omicron variant, which is causing an average of more than 2,000 deaths a day, has scared consumers enough to cut back on flights, dining out and in-store shopping during the past month, according to Chase credit and debit card spending data, said Michael Feroli, chief U.S. economist at J.P. Morgan. Those pullbacks in travel and entertainment spending, he says, mirror Americans’ behavior during the earlier rounds of the coronavirus.
“All of these things together suggest that omicron is hitting activity,” he said. “But we do expect it to be short-lived in part because omicron appears to be short-lived and we’re already seeing cases decline pretty rapidly in places that got hit hardest, earliest.”
Nicole Panettieri, the owner of a boutique in Astoria, Queens, said she was surprised when holiday sales remained strong even after omicron brought much of New York City to a standstill in late December. But in the weeks since, business has fallen off a cliff, by about 30 percent from a year ago.
“We’ve taken a drastic downturn,” Panettieri said of her accessories and gift shop, the Brass Owl. “People pushed through the holidays — spending money on gifts and sharing joy with family — but now there’s a perfect storm of covid, inflation and just so much uncertainty. People are not spending anymore. I mean, I wouldn’t want to buy a $30 candle right now either.”
She’s hoping the outlook will improve within a few months, as warmer weather and fewer covid cases get shoppers to spend again.
Economists are forecasting a spring revival as consumers once again unleash pent-up demand. Although retail sales unexpectedly fell 1.9 percent in December after two months of growth, many note that the decline was not as sharp as earlier drops during the pandemic. Diane Swonk, chief economist for Grant Thornton, says she expects economic growth to slow to 1.5 percent in the first three months of the year, before picking back up.
“We know it’s going to be a weak quarter, but we’ll get momentum again,” she said. “Things will open back up and people will feel more comfortable venturing back out again. With a little patience, we can hopefully get the engine roaring again by March.”
Andrew Van Dam and Rachel Siegel contributed to this report.
