Each year Matthew Gardner, Windermere’s Chief Economist, applies his vast insights to the state of our economy and housing market to forecast upcoming trends for the year ahead.
Although we all had hoped that COVID-19 would have become a distant memory by now and that the U.S. economy would have fully recovered, this is not entirely the case. The pandemic’s influence on the economy is still being felt; all the data sets that Gardner tracks indicate that although the economy is certainly healing, COVID continues to act as a drag on economic growth, a trend Gardner expects to continue through the spring of next year.
Economic Recovery & Growth
Because of this, Gardner – along with many other economists – has spent the last few months lowering his forecasts for economic growth at least through the middle of 2022.
Above is Gardner’s forecast for national economic growth through the end of next year. Though he is cautious in regard to the economy as we move through the winter and into 2022, Gardner is still expecting to see a fairly decent bounce back in the fourth quarter of 2021, following the disappointing rate experienced in Q3.
On an annualized basis, Gardner believes the economy will end 2021 having expanded by just short of 5% for the year. He predicts growth will come in a little below 4% in 2022.
Simply put, the impacts of COVID-19 are going to continue to act as a drag on virus sensitive consumer services next year, and ongoing supply chain issues will also delay the recovery. Both of these impacts have a depressive effect on economic growth, but Gardner does not see any chance that we will fall back into a recession.
Looking at employment data sets, the chart above shows Gardner’s forecast for average monthly growth in jobs during each quarter. To provide more context, over the last decade the country has added an average of around 200,000 jobs per month during any quarter. Gardner’s forecast points toward more robust employment growth through 2022, and he expects to see the country return to pre-COVID employment levels in the second half of the year.
With jobs continuing to return, Gardner expects the national unemployment rate to continue trending lower, breaking below 4% during the final quarter of 2022. With the expiration of enhanced unemployment benefits – in concert with wages rising significantly in many face-to-face industries such as leisure and hospitality – prospects for people currently unemployed are looking better. With that in mind, there are still millions of unemployed Americans who are not looking for work even with wages rising, and the labor force still down by 3 million from its pre-pandemic peak. This is worrying as businesses continue to have a hard time finding employees, which raises the expectation that inflation will remain higher for longer than Gardner would have liked to see.
Measures of Inflation
Gardner’s final economic forecast is his outlook for inflation. Supply chain issues and labor shortages have increased prices significantly and the chart below shows annual changes in all consumer prices. Gardner expects these to remain around 5% until next spring, before gradually dropping below 3% by the end of 2022.
But the core inflation rate – which excludes the volatile food and energy sectors – won’t peak until early 2022 before it too starts to gradually pull back. At these levels, the Federal Reserve will undoubtedly have started to raise interest rates to counteract inflationary pressures. This is not ideal, but Gardner does not believe that we are in an inflationary spiral, or that “stagflation” will raise its ugly head again.