According to a new U.S. Economic Outlook produced by economists at the University of Michigan in Ann Arbor, the job market has been recovering despite waves of COVID-19, yet inflation, supply chain strains, and more could prevent broad, sustained economic momentum.
The report shows that October saw more than a half-million payroll jobs added — the strongest reading since July — mostly in the service sector and public education. Demand for goods and services is likely to remain strong with a slight slowdown early next year, leading to continued payroll job gains and rapid declines in the jobless rate.
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.
“Overall, the current economic picture remains extremely blurry, with many moving parts and developing stories,” says Manaenkov. “While overall demand is high, economic uncertainty is high as well, which complicates our forecasting task significantly.”
The outlooks shows that the real gross domestic product has some volatility. Real GDP growth over the summer quarter plunged to 2 percent at an annual rate, as the pace of service consumption slowed, and vehicle sales dropped. It is expected to rebound to 3.6 percent by year’s end as consumption growth recovers to a level still constrained by supply chain issues.
It also calls for slowed consumption early next year amid another pandemic wave, with the silver lining of giving businesses some time to restock inventory. The researchers expect real GDP growth to accelerate to an average quarterly pace of 5 percent in the middle of next year, but fall to 2.2 percent by the end of 2023.
Other key findings and trends cited in the report:
- The unemployment rate is expected to fall from 4.5 percent by the end of this year to 3.7 percent by the end of next year and 3.5 percent 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 percent 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 percent 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.
The economists expect supply-side disruptions and inflation will ease in the coming two years with the stipulation that — along with the path out of the pandemic — the factors remain difficult to predict.
“Aside from the pandemic, the biggest questions for the economy next year are on the supply side,” says Ehrlich. “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.”