Economic Intermission 2021

Mid-year is a perfect time to catch our collective breaths and take stock of where the economy is, and could be heading. Welcome to Intermission 2021!

U.S. Economy:? The economy expanded at a?6.4 percent annualized pace ?in the first quarter, and for all of 2021, growth is expected to increase by more than 7 percent, according to Grant Thornton Chief Economist Diane Swonk. If so, it would be the strongest yearlong pace since 1984, when it was 7.2 percent. If the numbers are just slightly better than that, it would be the?strongest pace ?in 70 years, when the post WWII boom occurred. The welcome pickup in growth comes after the worst contraction since the Great Depression.

Employment: The economy should continue to add jobs throughout the year, but with a labor market in flux, it’s hard to predict with any certainty how many of the more than 7 million jobs that have been casualties of the pandemic recession, will be fully recovered, and when that full recovery might occur. Estimates are all over the pace, but most economists agree that the labor market should look more “normal” sometime in 2022.

Inflation: When I asked Swonk about the spike in prices, she responded, “We are in the Great Unknown”. While it was expected that inflation would surge in the short term, what is not clear is just how much of the increase will burn off. “High prices are the ultimate corrector to high prices,” says Swonk, which means that when stuff costs too much, consumers and businesses pull back. That process is unfolding in the goods sector of the economy but will take some time to work through the service side. Swonk believes that prices should moderate by the end of 2022.

Federal Reserve:?Although the economy is “strong,” and “solid”, the Fed is focused on employment gains, which have retreated from the blistering pace that was anticipated, and inflation, which is likely to run hotter than previously predicted. The situation puts officials in a tricky position: they are tasked with the dual mandate of full employment and price stability, but sometimes those two goals are in conflict.

Right now, central bankers are counting on price increases being “transitory”, or temporary, which allows them to focus on fostering an economy that will put more people back to work. But how long will the Fed allow inflation to remain above its desired threshold of 2 percent, before acting to curb it? In the past, they have erred on the side of raising interest rates sooner, rather than later, which could potentially snuff out the recovery. Consensus is that the Fed will not raise rates until well into 2022.

Housing: The hot housing market may be cooling, as would be buyers are sick of the endless search process, which often culminates in getting out-bid. Both existing and new home sales are slowing down, mostly because there are still so few homes for sale. Unfortunately, low inventory levels have pushed up prices. However, those higher prices, combined with a tick up in mortgage rates, has made home purchases less affordable. Those conditions argue for a slowdown in house price gains over the second half of the year.

Markets: After the first six months of the year, which featured volatility in meme stocks, Bitcoin, and NFTs, the more traditional parts of the stock and bond markets seem to have settled into more boring, range-bound action. When fears of inflation escalate, the sellers take over; and when those fears recede, and are replaced with hopes of increased corporate earnings, the buyers jump in. Analysts believe that the push-pull between the two could persist for the rest of the year.