The U.S. economy is recovering rapidly and is expected to yield inflation-adjusted growth of 7.2% over the four quarters of this year before easing to a still-robust 3.1% in 2022, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee.
“Since the committee met in January, further federal stimulus and a tremendously successful vaccine rollout are fueling the fastest economic recovery in 75 years,” said Beata Caranci, senior vice president and chief economist at TD Bank Group and the current EAC chair. “There is a high degree of confidence within the committee that a vigorous expansion will continue to unfold as consumers unleash pent-up demand in the months ahead.”
For 2022, the bank economists forecast both household and business spending growth to moderate. The group predicts both to rise near 8% in 2021, before slowing to 3% and 5%, respectively, in 2022. The improving health of the global economy is expected to support accelerating export growth.
“Booming U.S. demand coupled with a gradually reopening global economy has generated cost pressures related to supply chain disruptions and labor-market mismatches,” said Caranci. “These constraints have tempered growth in some sectors and are pushing U.S. inflation higher.”
The reviving economy should lead to vigorous job gains, according to the committee. The bank economists expect more than 550,000 average monthly new jobs this year to bring the unemployment rate down from 6.1% at present to 5.0% at year end. In 2022, the group expects unemployment to reach what it sees as full employment at 4.0%, averaging almost 300,000 monthly job gains. Nonetheless, due to labor market scarring and early retirements, the group doesn’t expect the participation rate to return to pre-pandemic levels over the forecast horizon.
The committee sees the combination of temporary supply-side constraints and strong demand keeping inflation elevated at 3.5% by year-end as measured by the Consumer Price Index and 2.6% as per the core Personal Consumption Expenditures measure preferred by the Federal Reserve. Although the group views this level of inflation as largely transitory, the risks are skewed to the upside. The committee forecasts sustained price gains above 2% even as supply constraints ease into 2022.
“Inflation will not be below the long-run average in this business cycle,” said Caranci. “We believe the Federal Reserve will succeed in achieving sustained inflation in excess of 2% under its Average Inflation Target objective. The Fed should begin tapering its nearly $8 trillion portfolio no later than the first quarter of next year.”
Consistent with this monetary policy outlook, the 10-year Treasury bond rate will rise from 1.6% now to 1.9% later this year and 2.1% next year, according to the committee.
The 30-year mortgage rate is forecast to follow suit, rising from 3.l% now to 3.3% in December and 3.6% a year later. The bank economists expect housing price pressures to persist due to borrowing costs still near all-time lows and tight inventories of homes for sale. Average existing home prices are expected to rise 9.8% this year and 3.8% next year.
The members of the 2021 ABA Economic Advisory Committee are:
- EAC Chair Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;
- Scott Anderson, EVP and chief economist, Bank of the West/BNP Paribas, San Francisco;
- Scott J. Brown, SVP and chief economist, Raymond James Financial, St. Petersburg, Fla.;
- Richard DeKaser, EVP and chief corporate economist, Wells Fargo & Co., Washington;
- Robert Dye, SVP and chief economist, Comerica Bank, Dallas;
- Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
- Ethan Harris, managing director and head of global economics, Bank of America Securities, New York;
- Peter Hooper, managing director and global head of economics, Deutsche Bank Securities Inc., New York;
- Nathaniel Karp, EVP and chief economist, BBVA USA, Inc., The Woodlands, Texas;
- Bruce Kasman, managing director and chief economist, JPMorgan Chase & Co., New York;
- Christopher Low, chief economist, First Horizon National Corp’s FTN Financial, New York;
- Simona Mocuta, managing director and senior economist, State Street Global Advisors, Boston;
- George Mokrzan, director of economics, Huntington Bancshares, Inc., Columbus, Ohio;
- Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Alabama;
- Doug Porter, managing director and chief economist, BMO Financial Group, Toronto;
- Carl Tannenbaum, EVP and chief economist, The Northern Trust Company, Chicago; and
- Ellen Zentner, managing director and chief U.S economist, Morgan Stanley, New York.