Fiscal stimulus powers U.S. economy in 2021 to its best performance

WASHINGTON, Jan 27 (Reuters) – The U.S. economy notched its strongest growth in nearly four decades in 2021 after the government pumped trillions of dollars in COVID-19 relief, and is seen forging ahead despite headwinds from the pandemic, strained supply chains as well as inflation.

A surge in gross domestic product in the fourth quarter as businesses replenished depleted inventories to meet strong demand for goods was the final push. Last year’s robust growth reported by the Commerce Department on Thursday supports the Federal Reserve’s pivot towards raising interest rates in March.

Fed Chair Jerome Powell told reporters on Wednesday after a two-day policy meeting that “the economy no longer needs sustained high levels of monetary policy support,” and that “it will soon be appropriate to raise” rates. read more

“While Omicron will lead to weaker growth in the first quarter, activity is expected to rebound nicely once the latest pandemic wave abates and supply-chain glitches ease,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

“The Fed will need to be ‘humble and nimble’ as it navigates underlying economic strength, worsening labor shortages, and stubbornly high inflation.”

The economy grew 5.7% in 2021, the strongest since 1984, as the government provided nearly $6 trillion in pandemic relief. It contracted 3.4% in 2020, the biggest drop in 74 years.

President Joe Biden quickly took credit for the stunning performance, which he said was “no accident.”

Biden’s popularity is falling amid a stalled domestic economic agenda after Congress failed to pass his signature $1.75 trillion Build Back Better legislation.

“We are finally building an American economy for the 21st Century, and I urge Congress to continue this momentum by passing legislation to make America more competitive, bolster our supply chains, strengthen our manufacturing and innovation, invest in our families and clean energy, and lower kitchen table costs,” Biden said in a statement.

Gross domestic product increased at a 6.9% annualized rate in the fourth quarter, the government said in its advance GDP estimate. That followed a 2.3% growth pace in the third quarter.

Growth is 3.1% above its pre-pandemic level.

Economists polled by Reuters had forecast GDP growth rising at a 5.5% rate.

The momentum, however, faded by December amid an onslaught of COVID-19 infections, fueled by the Omicron variant, which contributed to undercutting spending as well as disrupting activity at factories and services businesses. But there are, signs that infections have peaked, which could lead to increased demand for services by spring.

Inventory investment increased at a $173.5 billion rate, contributing 4.90 percentage points to GDP growth, the most since the third…