U-M economists see signs of US growth amid volatile picture, potential disruptions

November 18, 2021
Contact: Jeff Karoub jkaroub@umich.edu

The U.S. job market has been recovering despite pandemic waves, inflation woes and supply chain strains, yet those and other barriers could threaten broad, sustained economic momentum.

University of Michigan economists say October saw more than a half-million payroll jobs added—its strongest reading since July—mostly in the service sector and public education. They say demand for goods and services is likely to remain strong, albeit with a slight slowdown early next year, leading to continued payroll job gains and rapid declines in the jobless rate.

According to their annual U.S. Economic Outlook, a peek at the real gross domestic product—the value of everything produced in a country—reveals some of the volatility and opacity. Real GDP growth over the summer quarter plunged to 2% at an annual rate, as the pace of service consumption slowed and vehicle sales dropped, but is expected to rebound to 3.6% by year’s end as consumption growth recovers yet is still constrained by supply-chain problems.

The forecast calls for slowed consumption growth early next year amid another pandemic wave but businesses should be able to finally restock inventory. The researchers expect real GDP growth to accelerate to an average quarterly pace of over 5% in the middle of next year but fall to 2.2% by the end of 2023.

The forecast, produced four times per year by the Research Seminar in Quantitative Economics in the U-M Department of Economics since 1952, was prepared by U-M economists Tina Dhariwal, Gabriel Ehrlich, Daniil Manaenkov and Tereza Ranosova.

Daniil Manaenkov

Daniil Manaenkov

“Overall, the current economic picture remains extremely blurry, with many moving parts and developing stories,” Manaenkov said. “While overall demand is high, economic uncertainty is high as well, which complicates our forecasting task significantly.”

Other key findings and trends cited in the report:

  • The unemployment rate is expected to fall from 4.5% by the end of this year to 3.7% by the end of next year and 3.5% by the end of 2023.
  • Job gains are expected to show 455,000 per month in the final quarter of this year and 323,000 in the first quarter of next year. The researchers say the slowing will be caused by another wave of COVID-19 infections and vaccine regulations increasing job turnover. Job gains should accelerate over spring and summer 2022 and then gradually moderate to 184,000 per month by the end of 2023 as the economy reaches full employment.
  • Real disposable income spiked 6.2% in 2020, thanks to federal income replacement programs. Those stimulus and benefit programs along with accelerating wage growth continue to boost disposable income this year, though it’s expected to shrink to 3.3% next year as those government boosts cease. Consumption has exploded in 2021 with the improving pandemic situation and rising incomes, with a higher than normal saving rate owing to the federal benefits.

    Gabriel Ehrlich

    Gabriel Ehrlich

The economists expect supply-side disruptions and inflation will ease over the next two years but they, along with the path out of the pandemic, remain difficult to discern. The Federal Reserve likely would act to prevent prolonged inflation but a tightened monetary policy could stunt real economic growth. Conversely, if supply-chain strains are resolved faster than they anticipate, the Fed could raise interest rates at a slower pace and fuel faster growth.

“Aside from the pandemic, the biggest questions for the economy next year are on the supply side,” Ehrlich said. “First, will the supply chain get back to normal? Second, will workers start coming back into the labor force in earnest? Both of those developments would boost growth, and they would make the Fed’s job easier as well.”