MESSAGE
| DATE | 2021-04-11 |
| FROM | Ruben Safir
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| SUBJECT | Subject: [Hangout - NYLXS] WSJ has goone crazy predicting the best economy
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With Economy Poised for Best Growth Since 1983, Inflation Lurks
Gwynn Guilford and Anthony DeBarros
7-9 minutes
Ronald Reagan was in the White House, “Return of the Jedi” was in
theaters, and economic growth hit an astonishing 7.9%.
The U.S. has produced many more Star Wars films since 1983, but growth
has never approached that level—until this year, if economists are
right. Those surveyed by The Wall Street Journal boosted their average
forecast for 2021 economic growth to 6.4%, measured as the change in
inflation-adjusted gross domestic product in the fourth quarter from a
year earlier. If realized, that would be one of the few times in 70
years that the economy has grown so fast.
“We had an incredible shock, but look how fast we’re bouncing back,”
said Allen Sinai, chief global economist and strategist at Decision
Economics Inc. “We’re in the early stages of recovery, and we’ve got
three to five years to go. I think we’re going to end up in a boom.”
Complete Results
Economists expect growth to slow to 3.2% next year, which would still
make 2021-22 the strongest two-year performance since 2005.
That boom might have a potentially troubling side effect. Inflation, as
measured by the consumer-price index, is expected to jump sharply from
1.7% in February when March data is released Tuesday. That is partly a
quirk of the data, as outright declines in consumer prices recorded at
the start of the pandemic in March of last year drop from the 12-month
calculation.
Still, economists see further price pressures as the economy reopens,
with inflation accelerating to 3% in June, which would be the highest
since 2012, before slowing to 2.6% by December. They see the Federal
Reserve starting to raise rates in mid-2023, rather than 2024 or later,
as officials at the central bank have indicated.
The Wall Street Journal survey of 69 business, academic and financial
forecasters was conducted April 5-7. Not all participants responded to
every question.
As recently as December, economists expected solid but unspectacular
growth of 3.7% this year, reflecting the reversal of pandemic-induced
shutdowns as well as the Fed’s low interest rates. Then, in the waning
months of the Trump administration, the federal government authorized
two Covid-19 vaccines, and Congress passed a $900 billion coronavirus
relief package.
About a third of Americans have now received at least one shot,
according to the Centers for Disease Control and Prevention, and
Congress has approved another $1.9 trillion in fiscal support. On March
31, President Biden unveiled an infrastructure investment plan to be
partly financed by higher corporate taxes.
“Both in terms of magnitude and timing, that was a bigger jolt to the
economy than anticipated,” said Michelle Meyer, head of U.S. economics
at BofA Global Research, referring to fiscal stimulus. “Another very
important factor is the vaccination campaign, which is happening faster
than anticipated.”
A key factor in the U.S. economic recovery is the Covid-19 vaccination
campaign.
Photo: Don Campbell/Herald-Palladium/Associated Press
Economists in the survey on average now expect employers to add 7.1
million jobs in 2021, which would be the largest December-to-December
gain on record and up sharply from 4.9 million projected in the survey
late last year. At 5%, the increase would be the largest since 1978. The
unemployment rate is expected to fall to 4.8% by year-end, compared with
a projection of 5.6% late last year.
The outlook remains highly uncertain. In the past year, economists have
alternated between excessive optimism and pessimism. Vaccine hesitancy,
faster-spreading virus variants or the potential drag from a lagging
overseas economy could yet undercut growth this year.
Share Your Thoughts
What is your outlook on the economy? Join the conversation below.
Growth of 6% or better was more common before the 1980s, when underlying
growth was higher and usually came right after recessions with the help
of loose monetary and fiscal policy. The contraction in output in the
first half of last year was far more severe than any previous recession,
so a strong recovery was partly inevitable. Indeed, GDP rebounded
strongly in the third quarter of last year.
The scale of federal stimulus is greater than in the previous
recoveries, at nearly $6 trillion, or more than one-quarter of annual
GDP. Mr. Reagan’s combination of tax cuts and military spending was
spread out over a longer period, said Mr. Sinai. “It makes it hard for a
forecaster because I’ve not seen anything like this, ever,” he said.
That stimulus has significantly boosted federal debt, which some warn
could eventually raise interest rates sharply. Still, economists see the
10-year Treasury note yield rising only slowly from 1.66% on Friday to
around 1.9% by the end of this year and 2.5% by the end of 2023, still
lower than in 2018.
A hot economy could also bring the bugbear of inflation. Its path
depends heavily on how easily surging demand can be met with increased
production.
“How does it shake out? Well, no one knows because no one has seen such
an experiment before—it’s like spending as much money to fight World War
II except there’s no enemy, we’re not spending it on defense, and it’s
not clear who will buy what,” said James F. Smith, macroeconomist at
EconForecaster LLC. “If the overwhelming majority of our demand goes to
domestically produced goods and services, we’re going to see bottlenecks
like we’ve never seen before.” More likely, though, some of that U.S.
demand will go toward goods and services from abroad, keeping prices in
check, Mr. Smith said.
The Fed’s 2% inflation target is based on the price index of
personal-consumption expenditures, which economists expect to advance
from 1.6% in February to 2.5% by the fourth quarter, and remain above 2%
through 2023. That is slightly higher than Fed officials themselves
expect. The central bank has said it would start to raise rates when
inflation reaches 2% and is headed higher and when full employment has
been achieved.
This year’s unusually torrid projected growth might be powered not just
by a return to pre-Covid-19 normalcy but also by technological,
structural and policy changes that could boost growth potential beyond
2021, said Ms. Meyer.
“We went through so much pain as a society around Covid, and there were
so many lives lost,” she said. “But in a way the economy was put into
hibernation for a period of time, supported by stimulus.” In the
intervening time, she added, firms invested in new technologies and
rethought workforce management in ways that could boost productivity and
labor-force participation. “The economy has now, in a sense, reset,” she
said.
--
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