Economic growth is decelerating in the second half of 2021 as the Delta variant weighs a bit on consumer activity while continued supply chain issues and lack of available workers limit business expansion. Job growth slowed sharply for August, especially within in-person industries, but we think this was mostly from potential workers not stepping forward (potentially renewed virus concerns) as firms continue to have record numbers of unfilled job openings. Consumer spending has faded modestly over the past few months, too, probably from Delta impact, shortages of things to buy (most notably autos and houses), and rising prices.
Still, business surveys show that demand for goods and services remains solid while job and income gains have been above-average over the past six months — which should help to keep real GDP growth above trend. The Fed is moving closer to tapering its asset purchases, but this should not affect the economy much aside from a modest increase in long-term interest rates over the next few months.
While the peak growth rates for this expansion likely occurred over the past year, the economy is expected to maintain an above-trend pace for some time. In the near term, the Delta variant and lingering supply chain issues will weaken consumer and business activity modestly, with real GDP growth during the third quarter expected to slow to around 3.5-4.0 percent. But if these supply headwinds fade in coming months (and if new COVID-19 infection rates drop), economic activity should accelerate again during the first half of 2022 — with a further strong 4.7 percent increase projected for next year.
Monetary policy is expected to remain extremely expansionary even as the Fed is likely to start tapering asset purchases by early 2022. An outright hike of interest rates should not occur until 2023 if inflation moderates as expected over the next year. An extended period of supply chain disruptions is a risk for slower economic growth and higher inflation in 2022 (and maybe earlier Fed tightening) but there are already signs of supply-chain healing across the global economy.
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The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness.