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After a huge year for growth, the U.S. economy is about to slam into a wall

Free food is distributed by the Brooklyn community organization PASWO during a weekly food distribution on December 8, 2021 in New York City.

Spencer Platt | Getty Images

Encouraged by massive stockpiling and cash flushing of consumers, the U.S. economy grew at its fastest pace since 1984 last year.

Do not expect a repeat performance in 2022.

In fact, the year starts with few signs of growth at all, as the spread of omicron in the late year combined with the declining tailwind of fiscal stimulus has caused economists across Wall Street to knock down their forecasts for gross domestic product.

Combine that with a Federal Reserve that has gone from the easiest policy in its history to heightened inflation fighters, and the picture has suddenly changed significantly. The Atlanta Fed’s GDPNow meter currently tracks a first-quarter GDP growth of just 0.1%.

“The economy is slowing down and changing,” said Joseph LaVorgna, chief economist of the Americas at Natixis and former chief economist of the National Economic Council under then-President Donald Trump. “It’s not a recession, but it will be if the Fed tries to get too aggressive.”

GDP grew by an impressive 6.9% in the fourth quarter of 2021 to end a year in which the measurement of all goods and services produced in the United States increased 5.7% on an annual basis. It came after a pandemic-induced decline of 3.4% in 2020, a year that experienced the steepest but shortest recession in U.S. history.

But the way forward is less certain.

A large portion of this gain at the end of the year was driven by a stock conversion that contributed 4.9 percentage points or 71% of the total amount. Inventories were responsible for almost the entire third quarter GDP growth of 2.3%.

At the same time, Tuesday’s ISM Manufacturing survey showed that the pace of new orders, while still showing progress, is declining significantly.

Taken together, it is not much of a recipe for sustained growth.

“Stocks are roughly back to where they should be,” says Mark Zandi, chief economist at Moody’s Analytics. “Then you have growing headwinds from fiscal and monetary policy. So yes, growth starting the year will be very soft.”

Economists play catch-up

Wall Street economists have quickly lowered their growth forecasts.

Goldman Sachs lowered its first-quarter GDP outlook to 0.5%, down from 2%. The bank also reduced its full-year outlook to 3.2%, well below the current consensus of 3.8%.

“Growth is likely to slow sharply in 2022 as fiscal support fades, and in the short term the virus spread weighs on spending on services and prolongs supply chain disruptions,” Goldman economist Ronnie Walker said in a note to clients. “Q1 growth is likely to be particularly soft because the fiscal move will be accompanied by a hit from Omicron.”

Likewise, Bank of America lowered its first-quarter figure to 1% from 4% and lowered its full-year forecast to 3.6% from 4%, with the risks of this forecast apparently tilting downwards.

Bank of America’s head of global economics research Ethan Harris mentioned four reasons for the poor outlook: omicron, stock market decline, less fiscal support and also a tighter Fed.

“We now expect a fiscal package that is about half the size of the Build Back Better Act, with less front-loaded fiscal stimulus. We think it will increase growth in 2022 by only 15-20 [basis points], compared to our previous estimate of 50bp, “Harris wrote.” Risk of negative growth [first] quarter are significant in our view. “

A base point is 1/100 of a percentage point.

Bank of America has another wrinkle in its forecast: a call for seven 25 basis point rate hikes this year. It’s significantly more aggressive than anywhere else on the street, which currently rates five increases with about a 31% chance of a sixth, according to CME.

Zandi said the Fed needs to make sure it does not go too far in its fight against inflation, which has been running at its highest in almost 40 years.

“They risk getting in front of themselves and exaggerating it. They’ve turned very hard here,” he said. “Market expectations are five rises. Six are now entering the debate and discussions. It feels like it could be a rate hike or two too far given the growing headwinds in the economy.”

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