Where is our economy headed? Let’s ask some people whose job it is to predict the future of the US economy. How about looking at three forecasts – one from the government economists, one from the university economists, and one from the business economists.
The Congressional Budget Office updated its economic forecast in July. The CBO is responsible for projecting federal revenues and costs for Congress, and the CBO needs a picture of the future of the economy to do this. If these people are wrong, it has consequences for national policy.
The research seminar on quantitative economics is facilitated by specialists from the University of Michigan. They released new forecasts in August. The RSQE has been forecasting for almost 70 years, and its professional reputation depends on its success.
The Philadelphia Federal Reserve asks business economists about their economic forecasts and publishes the averages. He interviewed 36 economists in August. If business economists aren’t right at least part of the time, they don’t get paid!
We have three respectable sources with recent predictions, all of them being urged to be right. Better yet, their forecasts are available on the Internet, free of charge. Search for CBO, RSQE, or “Philadelphia Fed Economic Forecasts” and you will find them.
Real GDP grew 6.6% in the second quarter, which is very fast, but the delta variant scares consumers and keeps workers at home. Will our recent rapid growth continue or will the COVID resurgence slow things down?
All three forecasts point to growth. The CBO says real GDP will grow 6.7% in 2021, RSQE says 5.8% and the business economists survey is 6.1% on average. Growth will also be rapid in 2022, they say, ranging from 4.1% to 5%. It won’t be until 2023 that growth rates will drop to 2%, as we did for most 20-year-olds.
We have grown rapidly, but we have not come back to where we want to be. The unemployment rate was still 5.2% in August, despite all the job offers. When will the unemployment rate drop below 4%, where it was before the pandemic brought down the economy?
Our forecasters disagree on this point. The CBO believes that will happen in 2022 when it says the unemployment rate will be 3.8%. Business economists say it won’t fall below 4% until 2023. The RSQE has an unemployment rate above 4% in 2023, and they don’t show a forecast for 2024. We can’t tell if their answer to the following – The 4% question is “later” or “never”.
The 12-month inflation rate was 5.2% in August, higher than it has been for decades. Will the current high inflation be temporary, or is it the start of another Big Inflation, like in the 1970s?
The forecasts all agree that high inflation is temporary. They all have inflation rates in 2022 in the low to mid range of 2%, similar to inflation in the last expansion.
The Federal Reserve is stimulating the economy with the lowest possible key interest rate. With rapid growth, falling unemployment and high inflation, the Fed is feeling some pressure to raise interest rates as soon as possible. When will the Federal Reserve raise interest rates?
We can tell from the forecast for the three-month Treasury bill interest rate, which is moving at the same pace as the Fed’s key rate. All three have it at a tenth of 1% in 2022. That means no Fed action next year. In 2023, however, RSQE and business economists see an increase in the short-term interest rate to half a 1%. That would mean a few quarter point rate hikes from the Fed. The CBO puts the rate at two tenths, which would mean just one hike by the end of 2023. Of course, the Fed may have other ideas.
Forecasts agree that we will see rapid growth this year and next, with the unemployment rate falling. They disagree on how long it will take to bring the unemployment rate back to 2019 levels. Inflation will come down by the middle of next year and the Fed will not act to raise rates. interest before 2023.
Maybe the forecast will be correct. Maybe they will be wrong. Either way, governments, businesses, and ordinary people will make important decisions based on these predictions.
Contact Larry Deboer, professor of agricultural economics at purdue university at [email protected]