According to the consensus estimate of Bloomberg-surveyed economists, the U.S. economy, as measured by real gross domestic product (GDP), is expected to grow 5.7% in 2021 and 4% in 2022, before reverting to closer to historical 2.4% growth in 2023. While consensus estimates do change over time, they are a good starting point for taking your bearings. Seeing how expectations have been changing can also offer some depth on what’s going on behind the scenes. Today we take a look at five things we can learn from changing U.S. growth expectations, as seen in LPL’s Chart of the Day.
“Two key takeaways from current growth expectations is that we’ve likely lost some growth to current headwinds from inflation, supply chain bottlenecks, and a tight labor market that won’t be recovered,” observed LPL Chief Market Strategist Ryan Detrick, “but even with that 2021 and 2022 combined are still expected to be the best stretch of two year growth since the 1980s.”
Looking more closely, here’s a deeper look at our five key takeaways from the forecast paths:
1) With two-year growth between 2021 and 2022 expected to come in around 9.9%, it’s hard to see a meaningful threat of stagflation, although there are risks. The year-to-date average for the “misery index” (trailing Consumer Price Index (CPI) inflation plus the unemployment rate), at 9.3%, is below even where it was from 2010 to 2012. Over the 10-year period from 1974 to 1983, the index averaged almost 16% and the average was not below 12% for any single year. It’s difficult to see what we’re experiencing now as comparable and current Bloomberg consensus expectations are for the misery index to fall to 7.5% for year-end 2022 and a benign 5.9% for year-end 2023.
2) Some growth will be lost. At its peak, the combined expected growth for 2021 and 2022 was 11.1%. Since then, the 2022 growth expectation has declined 0.9%, but that lost growth was not pushed forward into 2023. 2023 growth expectations fell 0.2% over the same period. Some of the lost activity due to supply chain disruptions and challenging labor markets simply will not return.
3) Despite the recent declines in growth expectations, they are still significantly higher than they were at the start of the year. At the end of 2020, combined U.S. growth in 2021 and 2022 was 7.1%. We are still over 2.5% above that level, even with recent downgrades.
4) Should 2021-2022 growth align with expectations, it will be the best two-year stretch since the Reagan 80s and would outpace the best two years of the prior expansion (2017-2018) by a wide margin. In fact, if we end 2021 with 5% growth, a likely outcome given growth year to date, it will be the first year above 5% since 1984.
5) Be careful with forecasts. We have seen them move substantially before and there is certainly a chance that they could again. Keep in mind also that this is the consensus best estimate, but views among individual forecasters vary widely and even the consensus can see quite a bit of movement over time.
While more than 1% has come out of the consensus growth forecast for 2021 and 2022, in absolute terms, the outlook is still quite strong. Looking back, the best single year of the last expansion was 2018 at 2.9%. That means there can still be quite a bit of downside from the current 2022 consensus view of 4.0% and next year would still be better than at any point last cycle. The risk for equity markets is that the consensus expectation is likely roughly priced in and meaningful further downgrades from here may push markets to adjust expectations. Nevertheless even 4.0% growth would provide a solid economic backdrop for markets and pessimism about supply chain disruptions may be passing their peak, leaving room for a potentially “surprising” upside surprise.
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