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U.S. economic growth forecasts tempered by ongoing COVID, market concerns

BY Sunday, December 19, 2021 06:35pm

The latest coronavirus variant to emerge in a nearly two-year pandemic creates further uncertainty for the U.S. economy in 2022, although economists generally expect continued strong growth.

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Outlooks forecast elevated inflation in 2022 with the consumer price index easing throughout the year, though not enough to avoid higher interest rates. Economists also expect tight labor markets and bottlenecked supply chains to ease, helping to curtail inflation that’s been running at its highest point in 40 years, including at 6.8 percent in November.

Economists in recent weeks issued their annual economic outlooks for the U.S. amid the emergence of the omicron variant and expectations that large-scale restrictions will not reoccur as the pandemic continues.

“The extent to which Omicron grows as an economic force depends on many factors, including global geography and the willingness and ability of governments to fine tune policy as more facts emerge,” Comerica Inc. Chief Economist Robert Dye wrote this month in his last monthly U.S. outlook of the year. “We maintain our assumption that Omicron and other new strains of COVID will not require large-scale closures of businesses and restrictions on daily activity in the U.S., as the initial wave of COVID did in the spring of 2020.”

Despite “great progress,” the U.S. economy is still “grappling” with the pandemic’s effects, said Anna Paulson, executive vice president and research director at the Federal Reserve Bank of Chicago.

Threats remain

The surge in COVID-19 cases through the fall and into winter — and the omicron variant’s emergence — pose threats to the economy and “are a sharp reminder that we remain in the grips of the pandemic and must be humble in our assessments,” Paulson said.

University of Michigan Economist Daniil Manaenkov described 2022 as a “partial return to normal” for the economy, albeit with high uncertainty in the outlook. Even as new virus variants emerge, “we do not expect the return of most economically disruptive mitigation measures for several reasons, including the availability of vaccines and their high rate of effectiveness,” Manaenkov said.

“There are plenty of big risks on the pandemic, inflation, monetary and fiscal policy, housing, and what’s happening in supply chains,” Manaenkov, a U.S. forecasting specialist at the university’s Research Seminar in Quantitative Economics, said in a recent economic outlook conference.

University of Michigan economists forecast Real GDP to average 4-percent growth for 2022, followed by a “good” 3.1-percent growth rate in 2023.

Real GDP should pick up after the first quarter as supply chains improve and inventories are replenished, Manaenkov said.

“By the second or third quarter (of 2022), we expect growth to accelerate to about a 5-percent pace, largely driven by a growing consumption of services as the pandemic eases and, hopefully, supply chain stress improves,” he said. “After that we expect a deceleration of growth to a 3-percent pace by 2023.”

Much of what occurs in the U.S. economy will hinge on labor force participation that dropped during the pandemic and which has been “very, very reluctant to come up,” Manaenkov said. Some of the labor force decline has come from people reluctant to return to the workforce as the pandemic continues, as well as from older workers who are retiring, he said.

“We think that the pandemic slowly going away will cause some people to return to the labor market, but it’s not going to be a slam dunk. It’s going to take a while. It’s going to be a gradual improvement in the participation rate,” Manaenkov said.

Comerica’s latest economic outlook forecasts 4.6-percent Real GDP growth for the U.S. in all of 2022, peaking at 5.4 percent in the second quarter and following an expected 5.5 percent for 2021.

The consumer price index (CPI) is expected to grow an average of 5.6 percent in 2022, up from an expected 4.6 percent in 2021. The CPI is expected to start the new year averaging 6 percent growth in the first quarter, then ease to 2.3 percent for the final three months of 2022, according to Comerica’s outlook.

“We continue to expect strong real GDP growth for 2022. Interest rates will remain near zero through the first half of the year. Supply chain constraints will gradually unwind, easing pressure on prices. Inventories will get rebuilt. Fiscal policy will be expansive,” Dye wrote in the Dec. 7 updated outlook.

Outlooks that two-dozen economists and business leaders submitted to the Federal Reserve Bank of Chicago projected consensus median Real GDP growth of 3.7 percent from the fourth quarter of 2021 to the fourth quarter of 2022. That will make for a “another strong year” of U.S. economic growth, said Thomas Walstrum, a senior business economist at the Federal Reserve Bank of Chicago.

“We had a really strong year for 2021 and I think it’s fair to say the expectation is for another strong year to come,” Walstrum said at the Chicago Fed’s economic outlook symposium.

Meeting last week, members of the Federal Reserve Open Market Committee decided to keep the federal funds rate at 0.1 percent but indicated rate increases are coming in 2022 by accelerating an end to asset purchases by midyear. The change was made “in light of inflation developments and the further improvement in the labor market,” the committee said in a statement.

Writing in an economic alert after the Dec. 15 FOMC meeting, Comerica’s Dye said the decision to accelerate asset purchases beginning in January appears “to set interest rate lift-off for the second quarter of 2022.” 

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