Bureau of Business Research
Date of this Version
The U.S. economy continues to recover from the recession which occurred during March and April of 2020. Demand has been strong for both goods and services. At the same time, supply constraints are a concern in the economy, contributing to both higher prices and in some cases lost production within industries. Supply constraints are evident in both inputs (supplies) and labor. Labor force growth has been anemic in the last two years given slow population growth and a roughly 2 percent decline in the labor force participation rate. Looking forward, the baseline outlook is for the U.S. economic recovery to continue. The pace of recovery, however, is expected to slow in the coming years. As was expected, U.S. real GDP growth has been robust in 2021, the first full year of recovery. Real GDP growth may be as high as 6.0 percent. U.S. GDP growth is expected to slow to 4.0 percent in 2022, 2.5 percent in 2023, and 2.5 percent in 2024. Employment growth also will slow over the outlook period. U.S. employment growth may be as high as 2.7 percent in 2021 but will slow to 2.0 percent in 2022, before falling back to trend growth at 1.3 percent in 2023 and 2024. U.S. population growth is expected to increase in the coming years but a significant portion of the decline in labor force participation will be permanent. Permanently lower labor force participation may continue to put upward pressure on wages. Upward pressure on wages could support higher inflation even after pressure from higher gasoline prices and supply-chain disruptions begin to ease. Inflation reached an annualized rate of over 6 percent in late 2021 and will be up by over 4.5 percent for the year as a whole. The Federal Reserve Bank will need to take action in the coming year to reduce inflation by decreasing bond purchases and initiating a round of short-term interest rate increases. Even with such actions, consumer prices are expected to rise by 3.5 to 4.5 percent in 2022. At the present time, there is too much uncertainty to make a more precise estimate. Consumer price inflation should moderate in 2023 and 2024. However, inflation will remain above 2.0 percent during much of that period. More generally, the higher pace of inflation poses risks to the economy, particularly in light of recent price increases for novel assets such as Crypto-currencies and non-fungible tokens. The value of more established assets such as the stock market and property are also elevated. The Federal Reserve Board may need to take more drastic action in the coming year to reduce inflation. Under this alternative scenario, sharp increases in the short-term interest rates will slow economic growth and have the potential to tip the economy into recession.
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