The U.S. economy grew by 5.7 percent in 2021, its biggest expansion since 1984, after its biggest drop, by 3.4 percent, in 74 years in 2020, the government reported Thursday.

Growth last year was fueled by massive fiscal stimulus as well as very low interest rates. The momentum, however, appears to have 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. 

The GDP increased at a 6.9 percent annualized rate in the last quarter of 2021, the Commerce Department reported.

Economists polled by Reuters had forecast GDP growth rising at a 5.5 percent rate. Estimates ranged from as low as a 3.4 percent rate to as high as a 7.0 percent pace.

Challenges remain

Prices accelerated during the year as well, peaking in the October-December period with a 6.5 percent surge in the personal consumption expenditures (PCE) price index – the measure which the Federal Reserve focuses on. That was the biggest increase in 40 years.

For the full year, inflation was 3.9 percent, according to the data. 

Excluding volatile food and energy prices which have increased sharply in the year, the core PCE price index rose 3.3 percent in 2021, and 4.9 percent in the fourth quarter.

Inventory investment accounted for the bulk of the increase in GDP growth in the fourth quarter. Businesses had been drawing down inventories since the first quarter of 2021. Spending shifted during the pandemic to goods from services, a demand boom that pressured supply chains.

Growth last quarter was also lifted by a jump in consumer spending in October before retreating considerably as Omicron spread across the country. Consumer spending, which accounts for more than two-thirds of economic activity, has been hampered by shortages of motor vehicles and other goods. A global chip shortage is hurting production, meanwhile.

Reduced household purchasing power, with inflation way above the Fed's 2 percent target, also hindered consumer spending at the tail end of the fourth quarter.

The Omicron-driven outbreak in infections has also impacted the labor market, though this is likely temporary. Employers are desperate for workers, with 10.6 million job openings at the end of November.

A separate report from the Labor Department on Thursday showed initial claims for jobless benefits dropped 30,000 to a seasonally adjusted 260,000 during the week ended January 22.

Despite the anticipated soft patch in the first quarter because of challenges from the never ending pandemic, the worst inflation in decades, supply chain bottle necks and upcoming interest rate increases, the economy is expected to soldier on this year, with growth estimates as high as 3.9 percent.

(With input from Reuters and AFP)