U.S. economic activity resurged in 2021 after a year marked by lockdowns and stay-in-place orders, with the rebound fueled by a combination of monetary and fiscal stimulus, as well as firm consumer spending.
However, against this backdrop, the second half of this year especially has seen an economy grappling with supply-side constraints and rising price pressures. Lingering virus concerns have compounded with still-elevated demand to push up inflation.
But next year, these pressures will begin to ease, according to a number of top Wall Street economists. A number of pundits have already delivered their forecasts on what to expect in the U.S. economy next year — and most expect to see easing inflation alongside somewhat slow growth in gross domestic product (GDP).
Some of these forecasts were provided before the Omicron variant was discovered in late November, which stirred up volatility across global markets as investors assessed the extent to which another coronavirus wave might impact economic activity and corporate earnings. Still, the data on the variant's health risk is still being collected and assessed.
Here's what some major economists had to say about their expectations for the economy next year.
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Goldman Sachs: 'The emergence of the Omicron variant increases the risks and uncertainty' for the economy
Goldman Sachs economists already slashed their forecast for U.S. economic activity in the wake of the discovery of the Omicron variant, suggesting the latest health threat could induce some restrictions and reignite some stay-in-place behaviors seen earlier during the pandemic.
The firm's updated forecast, delivered on Dec. 4, anticipates GDP will grow 3.8% on a full-year basis in 2022, or down from the 4.2% clip it saw previously.
This year, U.S. GDP grew at a real annualized rate of 6.4% in the first quarter, then 6.7% in the second and 2.1% in the third, based on the latest estimate for the quarter.
"The emergence of the Omicron variant increases the risks and uncertainty around the U.S. economic outlook," said the economists led by Jan Hatzius in a note. "While many questions remain unanswered, we now think a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely."
The firm sees three primary impacts of these virus concerns on economic activity.
"First, Omicron could slow economic reopening, but we expect only a modest drag on service spending because domestic virus-control policy and economic activity have become significantly less sensitive to virus spread," the economists said.
"Second, Omicron could exacerbate goods supply shortages if virus spread in other countries necessitates tight restrictions. This was a major problem during the Delta wave, but increases in vaccination rates in foreign trade partners since then should limit the scope for severe supply disruptions."
"Third, Omicron could delay the timeline for some people feeling comfortable returning to work and cause worker shortages to linger somewhat longer," he added.
In terms of the inflation outlook, the economists characterized the potential effects of Omicron as "ambiguous."
"Reduced demand for virus-sensitive services such as travel could have a disinflationary impact in the near term, but prior virus waves suggest that such pressure would be temporary and reverse as demand recovers," they wrote. "In contrast, further supply chain disruptions due to Omicron or further delays in the recovery of labor supply could have a somewhat more lasting inflationary impact."
Forecast based on note published Dec. 4, 2021
A Wall Street sign is pictured outside the New York Stock Exchange amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, U.S., April 16, 2021. REUTERS/Carlo Allegri ·Carlo Allegri / reuters
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Bank of America: Next year will be 'one of rebalancing'
Bank of America economist Michelle Meyer sees both GDP growth and inflation decelerating from current levels, but still remaining above pre-virus trends next year.
"While 2021 was a story of excess demand and a dearth of supply, we think 2022 will be one of rebalancing, albeit only gradually," Meyer wrote in a note. "This should take some of the heat off of inflation but not quickly enough, leaving the Fed to hike three times starting in June and continuing on a quarterly cadence."
The firm expects real GDP to rise by 4% next year. Bank of America also sees core personal consumption expenditures — the Federal Reserve's preferred inflation gauge — settling around 2.4% on a year-over-year basis by the fourth quarter next year. Core PCE had last risen at a 4.5% clip in the third quarter of this year.
"Consider the fundamentals: there is plenty of cash on household and corporate balance sheets, access to inexpensive credit and powerful positive wealth effects," Meyer said. "The data point to robust labor demand given elevated job openings, an inventory restock after a pandemic fueled depletion, and rapid investment in technology and IP to support productivity growth."
However, she also noted that these positive trends for economic growth are being capped by lingering supply-side constraints, with job openings remaining near record highs and broad-based inflation dragging down consumer sentiment.
"We think these cross-currents will leave growth to slow in 2022 relative to 2021 but still remain at more than double the pace of trend growth," Meyer said. "We forecast 2022 real GDP growth of 4% with a stronger first half than second half. Of the 4% growth, we estimate that 0.8pp [percentage points] will be due to the inventory cycle and hence 3.2% from final demand."
"On the upside, consumer spending will remain strong, corporate investment in equipment (i.e. capex) solid and intellectual property robust," she said. "This will offset modest weakness in both residential and nonresidential structures investment as well as further drag from a widening trade deficit. Beyond that in 2023, we expect real GDP growth of 2.2% — closer to trend."
Forecast based on note published Nov. 21, 2021
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Wells Fargo: Supply constraints will 'gradually ease over the course of the next two years'
Next year's economy will be marked by improving labor force participation and an attenuation of supply constraints, according to Wells Fargo economists led by Jay Bryson. However, even as some of these supply-side concerns lessen, inflation will likely still remain hot enough to prompt rate hikes by the Federal Reserve.
"Widespread labor shortages, overwhelmed supply chains and mounting inflation pressures have come to be unfortunate hallmarks of the economic recovery from the pandemic-induced recession," economists from the firm wrote in a note. "Many of these headwinds, however, are side effects from the unexpectedly strong bounce back in overall economic growth experienced over the past 18 months. One major theme of our November forecast is that we expect these constraints to gradually ease over the course of the next two years, which will help foster a still-robust pace of economic growth during that period."
The firm said it sees real GDP rising by 4.1% in 2022 before slowing to 3.3% in 2023. The view for next year, initially delivered in a note in mid-November, was reiterated by Wells Fargo Wealth and Investment Management Chief Investment Officer Darrell Cronk earlier this week. He said at the Reuters Investment Outlook Summit that economic growth would likely come in at approximately 4% next year.
Supply blockages should be cleared and supply chains functioning "more or less normally in 2023," the economists added in their note. However, they believe there is still little evidence that inflationary pressure will recede in the near-term, given the persistently hot inflation data coming in even months into the recovery. They expect the Consumer Price Index to post an annual rise of 5.2% during 2022, "a forecast that currently, sits near the top of consensus estimates."
"With inflation likely to remain hot and the labor market firmly on the path toward recovery, we now project an earlier lift off for the federal funds rate," they said. "We look for the FOMC to raise the target range for the federal funds rate by 25 bps in Q3-2022 and another 25 bps in Q4-2022. We expect two additional rate hikes of similar magnitude over the course of 2023."
