Forecaster Says Virus Variant Will Delay but Not Diminish U.S. Economic Growth Prospects
Monday, September 13th, 2021
The impact of COVID-19’s delta variant will delay but not diminish growth prospects, and a current surge in inflation will recede in 2022, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“The pause in growth is due to a decrease in consumption of contact-heavy service-sector products, such as hospitality, travel and elective healthcare because of the current surge in coronavirus illnesses and hospitalizations,” Dhawan said. “Once public health measures arrest the surge, consumer sentiment will improve, the service sector will reignite and growth will resume.”
The forecaster posited that three temporary factors are fueling inflation: the reopening of the hospitality and retail trade sectors, idiosyncratic supply chain disruptions and “super-sized stock market gains” leading to “spectacular home price growth.”
Dhawan said, “Hotel room rates have spiked, with a 10 percent increase in each quarter of 2021, as occupancy rose sharply after a long period of inactivity. And this was mostly leisure travel (meeting friends and family and taking summer vacations), which shows up in data as a rise in the consumer price index (CPI). But this is temporary. Another round of double-digit price increases would only happen if people began taking vacations not only in the summer, but also in the fall, and then again in winter – an absurdity, as it violates social calendar norms.”
Anomalous supply chain events (accidents at chip production plants in Taiwan) roiled U.S. car sales when chip shortages reduced new vehicle inventory and led to upward pressure on used-car prices.
“This was a one-time price increase that is already leveling off,” Dhawan said.
Dhawan acknowledged the seeming paradox of falling interest rates for 10-year treasury bonds given the high fiscal deficit and rising inflation.
“Why has the 10-year bond yield fallen for the last three months after peaking at 1.6 percent in March? And does this drop signal diminished growth prospects in 2022?” Dhawan asked. “Let me start by answering the second question. Growth prospects are undiminished but will be delayed.”
Dhawan attributed the drop in 10-year yields to an influx of funds triggered by the arrival of delta variant cases of COVID-19 and an uptick in geopolitical worries.
“Companies pause capital expenditures (investments) during times of uncertainty and park their money in the safest assets in the world – U.S. treasury bonds,” he said.
The forecaster asserted the flight to safety would be temporary, pointing to the widely held perception of statements by Federal Reserve Chair Jerome Powell as credible.
Dhawan’s final inflation factor is the heated residential real estate market, spurred by “dramatic” stock market performance since the lows of March 2020, which has fueled “spectacular” home price gains over the last 12 months.
“The pandemic triggered a demand shock – a change in housing taste and location preference – that has not abated during subsequent waves of the virus,” he said. “People are moving from crowded in-town areas to single-family homes farther out or farther away.”
“Once everyone has moved, the demand shock will abate. Affordability depends on price and interest rates. Although the Fed will not raise rates until well into 2023 (as tapering of bond purchases won’t begin until mid-2022),” he said. “Sustained high domestic fiscal deficits and eventual global recovery will push up long-bond yields, causing mortgage rates to reach 4.0 percent by late 2022.”
Dhawan said 2021 has averaged 617,000 new jobs per month from January to July, with almost 50 percent growth in the hospitality and retail trade sectors. The corporate sector, home to premium jobs, is not producing consistent job growth.
“Corporate job growth is at 52,000 new positions per month,” Dhawan said. “That’s only 8 percent of total job growth for a sector whose share of jobs is 14 percent. Further boosts for this sector will hinge on the global economy, which still hasn’t picked up speed because of vaccine scarcity.”
Highlights from Rajeev Dhawan’s National Economic Forecast
Gross domestic product (GDP) growth will be 5.0 percent in the third quarter of 2021, moderate to less than 3.0 percent in the subsequent two quarters before rebounding to 4.9 percent in the second quarter of 2022 and will be 4.2 percent in the third quarter of 2022.
Overall GDP growth will be 5.7 percent in 2021, 3.9 percent in 2022 and 2.7 percent in 2023.
Housing starts will average 1.560 million in 2021, 1.433 million in 2022 and 1.363 million in 2023. Vehicle sales will average 16.3 million in 2021, 16.9 million in 2022 and 18.1 million in 2023.
CPI inflation will be 4.3 percent in 2021, moderate to 3.1 percent in 2022 and further moderate to 2.4 percent in 2023. The 10-year bond rate will average 1.4 percent in 2021, 2.1 percent in 2022 and 2.5 percent in 2023.