Slower Growth in Q1

Real GDP, in the US, grew 5.5% in 2021, the fastest growth for any calendar year since the Reagan Boom in the mid-1980s. In spite of this, for the two years ending Q4-2021, real GDP grew just 1.6% annually, which is below its pre-shutdown trend.

Because of the shutdown and government actions growth has been uneven. Goods consumption is up 7.5% at an annual rate in the past two years, while services consumption has declined 0.4%. Thanks to a boom in investment during the second half of 2021, investment (including inventories and home building) is up an annualized 5.9% during the past two years.

These uneven growth rates will start to balance out during 2022 and beyond. And in the first quarter of this year, we are tracking a real GDP growth rate of 1.5%, although our forecast may change based on reports to be released in the next week and a half. The bottom line is that this is a far cry from the stellar growth of 2021, but not a recession, either. We expect growth will be a little faster in the second quarter, but, again, not nearly as fast as in 2021.

Right now, the US economy is a battle between forces boosting growth and forces dragging it down. What's supporting growth? First, continued re-opening from COVID-19. Americans are still in the process of returning to normal, but we're not completely there yet.

Second, monetary policy is still very loose. Even if the Federal Reserve raises rates by 2.25 percentage points this year, real interest rates will still be negative and monetary policy will not be tight.

Third, tax rates remain relatively low and are likely to stay that way. Major transformational legislation seems unlikely.