The U.S. economy remains on track to post a strong rebound in the fourth-quarter GDP report due January 27. Momentum, however, is expected to slow in early 2022 amid stronger macroeconomic headwinds.
Production in the final quarter of last year is on track to expand at a seasonally-adjusted annual rate of 6.8%, based on the median estimate of a set of nowcasts compiled by CapitalSpectator.com – down slightly from previous estimate end December. The expected gain marks a marked improvement compared to Q3 2.3% increase.
Change in US real GDP
The growth spurt from the third quarter is unlikely to last. Several factors are likely to weigh on the macroeconomic trend in the first quarter of this year, including continued supply chain constraints and fallout from the recent spread of the Omicron variant of the coronavirus.
“We feel like there are a lot of infections, but it’s not going to in all likelihood overwhelm us. But how long will this last? Because it’s disturbing.” said Mark Zandi, chief economist at Moody’s Analytics.
The tightening of monetary policy is also a reason to lower the growth forecast from the rebound in the fourth quarter. On Tuesday, Federal Reserve Chairman Jerome Powell outlined a framework for raising interest rates this year.
“As we move forward this year … if things go as expected, we will normalize policy, which means we will end our asset purchases in March, which means we will raise rates over the course of the year. year,” he said. Recount the U.S. Senate Committee on Banking, Housing, and Urban Affairs “At some point maybe later this year, we’ll start to let the toll drain, and that’s just the path to policy normalization .”
A decline in fiscal stimulus is also contributing to lower expectations for economic activity this year.
“Peaking fiscal policy support, and therefore peaking real GDP growth, was likely achieved in 2021, and the global economy now appears to be moving rapidly toward late-cycle momentum,” predicted PIMCO, an investment company.
For now, the focus is mainly on expectations of interest rate hikes. There is a wide variety of perspectives on how much and how quickly the Fed will raise its target rate, which is currently set in a range of 0% to 0.25%. Fed funds futures currently price in a 79% chance that the central bank will announce its first hike at the March 16 FOMC meeting, based on issues published by .
Goldman Sachs sees several more increases later in the year. By some accounts, the Fed will try to catch up as it seeks to normalize policy following a sharp rise in . In turn, the change in monetary posture is a threat to economic growth, according to some analysts.
“The pressure of the recession is intensifying” said Jeffrey Gundlach, who oversees DoubleLine, a fund manager. The Fed “seems quite far behind the curve when you look at wage growth,” he advises. “We are going to be more recession-aware than we have been.”
Maybe, but according to analysis in this week’s issue of The U.S. Business Cycle Risk Report, the risk of recession remains low for the time being. Economic momentum is expected to slow in early 2022, based on current estimates of the Economic Trend Index (ETI) and Economic Momentum Index (EMI) from the newsletter through February. But weaker growth does not yet translate into high recession risk: both indices are likely to remain well above their tipping points (50% and 0%, respectively) which reflect neutral levels for economic activity. .
Economic Dynamics and Economic Trend Index
The wild card is inflation and the reaction of the Fed. But in the short term, the US economy remains on track to grow, albeit at a slower pace. Now-casting.com’s current estimate for the first quarter is 3.2% (as of January 7), about half of the expected increase for the fourth quarter.
Deciding what will happen in the coming months is still very uncertain. The only relatively high view at the moment is that 2022 will unfold with a deceleration in growth and several lurking risk factors.
“The global economy is simultaneously facing COVID-19, inflation and political uncertainty, with government spending and monetary policies in uncharted territory,” observed World Bank President David Malpass.