Posted by: Josh Lehner | March 10, 2021

The Strong Growth Ahead

“The stage is set for stronger economic growth this year and next than the U.S. has experienced in decades, possibly generations.” That’s something our office wrote in the opening paragraph of our latest forecast and I have been getting a few questions about it lately. The main reasons for the bullish outlook is the waning pandemic, the strong federal policy response that has total income higher today than before the pandemic, and the fact that business closures and economic scarring is much better than feared.

Currently the consensus forecast for U.S. GDP is to increase by 6% this year. The consensus has been moving higher over the past handful of months, a pattern likely to continue. Many of the more prominent forecasters including Wall Street firms and macro consultants are more like 7%, including Goldman Sachs and Moody’s Analytics. The latest global outlook from the OECD pegs U.S. GDP at 6.5% this year and 4% next year. Let’s take that as an example and just show it visually. The U.S. economy has not experienced such growth in decades, and only once since the 1960s, that would be 1984’s “Morning in America.” Keep in mind that only about 1 in 5 Oregonians in the workforce today was an adult back in the early 1980s. That means 4 in 5 have never experienced anything approaching these types of numbers. For this simple reason, the outlook is probably brighter than the conventional wisdom appears to realize. [Update 3/15: Goldman Sachs and Morgan Stanley are both at 8% now]

Now, a key underpinning to the outlook is the concept of pent-up demand. Many activities and forms of consumer spending have been restricted during the pandemic, due to public health policies and fearful consumers unwilling to venture out. When households feel reasonably safe enough, they will do so again. And most have the means to spend when the time comes. That time is fast approaching and is even here for some of us.

How can we be so sure? For starters, Oregon set a record last week for video lottery sales. The fact that video sales fully rebounded last summer, and again in recent weeks is proof enough that cabin fever is real. Overall consumer spending will accelerate in the months ahead, especially as about 1 in 4 adult Oregonians has received at least one dose of the vaccine so far. The outlook brightens with every inoculation.

In our forecast, and in recent presentations our office points out that many of these hard-hit leisure and hospitality firms will need to staff back up as spending increases. Yes, employment in bars and restaurants is down 30% or so, but that largely matches consumer spending patterns in the past year. The increase in spending on these in-person services will be very pro-jobs.

OK, this is all well and good, but won’t the strong growth ahead lead to an overheating economy? This is a concern among some forecasters and is a risk to the outlook. Ultimately the concern is that should inflation rise considerably on a sustained basis, the Federal Reserve will need to step in and raise interest rates, which will likely cause a recession. Right now our office does not believe it is highly likely to occur and wrote about it extensively in our latest forecast (see PDF pg 9). That said, I think it’s fair to say there will be some one-time increases in prices ahead as we all try to get on the same plane to Cancun or take the family to entertainment parks this summer. However the current outlook does not expect these price increases to translate into broader overall inflation, or certainly not on a persistent basis. Time will tell.

Finally, a quick note on the revenue outlook. While our office has a stronger economic forecast built in, all bets are off in terms of revenues to end the current 2019-21 biennium. We still have one full tax filing season to go. There is certainly some upside risk with stronger employment and wage growth but there is also a lot of unknowns in terms of business income, particularly so-called pass-through entities that pay through the personal side. To date quarterly estimated payments have held up but year-end returns may differ dramatically given everything that has happened in the past year. We won’t know more here until late April and early May after the bulk of the tax returns are processed.


Responses

  1. Growth? Hmmmm, maybe more like recovery. We still have a lot of people out of work due to the pandemic and, while the outlook for hiring may be positive, its probably also true that the labor participation rate – a key factor in GDP growth – is likely to remain depressed for some time. As a result, GDP output may indeed be recovering, but to reach pre-pandemic levels and begin actual new growth will take longer. It’s also worth considering how long it will take to reach herd levels of immunity and the effects of new variants of the Covid virus. As long as unemployment levels remain above pre-pandemic levels, I don’t see there being much real pressure on wages. However, if we reach pre-pandemic levels of output and unemployment and labor and consumer demand remains strong, maybe then inflation will be of more concern.

    • Thanks Scott. I agree that anti-vaxxers and herd immunity may prove more challenging than it appears today. That said, from an underlying economic story, the outlook is considerably different than in past cycles. The level of GDP is likely back to pre-COVID figures in the second quarter, and back to potential by the end of the year, see the first link below. In terms of wages, this is something we’ve continued to revise higher with each forecast. The data indicate that for those who did not lose their jobs, wage gains have continued at about the same pace as pre-COVID trends. There has yet to be any traditional slowing due to a weak labor market. Given this, we have removed that part of the outlook. It may rear its head in the year ahead, but so far it has not. See PDF pages 12-13 at the second link.

      https://www.hamiltonproject.org/blog/the_macroeconomic_implications_of_bidens_1.9_trillion_fiscal_package
      https://digital.osl.state.or.us/islandora/object/osl%3A964044/datastream/OBJ/view


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