US economic outlook: November 2021
|Intensifying inflation pressures will prompt the Fed to hike rates in 2022
COVID case counts have come down considerably, and while it is difficult to foresee whether a winter wave is in the cards, rising vaccination rates and an expanding toolbox of therapeutics are reasons to be optimistic that future iterations of the virus will be less impactful from an economic perspective.
Despite a marked slowdown in the third quarter, real GDP is on pace to expand 5.5% in 2021, which is just a tick slower than the 5.6% rate expected in our October forecast update. Expansion is expected to moderate from there, but healthy household and corporate balances sheets should help drive an above-trend pace of growth. We anticipate real GDP to rise 4.1% in 2022 and 3.3% in 2023.
Labor shortages have weighed on businesses, but October’s strong employment report indicates that the loss of momentum during the Delta wave was not as substantial as initially thought. Laborforce participation, on the other hand, has been sluggish to return to pre-pandemic form, but we forecast improvement on this front in the year ahead.
We expect the supply chain blockages that have been hampering many parts of the economy to begin to clear up over the course of next year and be functioning more or less normally in 2023. While the holiday season will likely be a strain in the near term, logistics networks presumably will be under far less stress as the calendar moves into 2022.
Even though we expect supply chains to be running more smoothly in 2023, there is little evidence that inflationary pressures will ease in the foreseeable future. The Consumer Price Index (CPI) rose6.2% year over year in October, and inflation appears set to push even higher over the next few months. We look for a 5.2% annual rise in the CPI during 2022, a forecast that currently sits near the top of consensus estimates.
With inflation likely to remain hot and the labor market firmly on the path toward recovery, we now project an earlier lift-off for the federal funds rate. We look for the FOMC to raise the target range for the federal funds rate by 25 bps in Q3-2022 and another 25 bps in Q4-2022. We expect two additional rate hikes of similar magnitude over the course of 2023.
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