Published in Economic Development

U-M economic outlook shows short-term return to growth; inflation concerns through 2023

BY Friday, May 20, 2022 12:53pm

University of Michigan economists expect second-quarter growth for the U.S. economy, although momentum may wane in the latter half of the year as interest rates rise.

The updated U.S. economic outlook that the university’s Research Seminar in Quantitative Economics issued today forecasts 3.9-percent Real GDP growth for the second quarter, a reversal from the 1.4-percent decline in the first quarter.

“Considerable production and consumption disruptions due to the Omicron wave of the pandemic likely held back both consumption and inventory investment in (the first quarter). The recent stock market rout notwithstanding, the near-term growth momentum appears strong, and we project solid economic growth to resume” in the second quarter, University of Michigan economists wrote in their updated outlook.

After rebounding in the present period, Real GDP is then expected to ease in the third quarter to a 1.7-percent rate, “reflecting a general slowdown due to higher interest rates and sluggish labor supply growth,” economists wrote. They noted that the Russia-Ukraine war, “inflation, the receding pandemic, and the rapidly changing policy environment makes for an extremely challenging environment to forecast.”

The University of Michigan outlook projects Real GDP growth of 2.9 percent for all of 2022, followed by 2.1 percent in 2023 and 1.9 percent in 2024.

An outlook earlier this month from Comerica Inc. projected 2.9-percent Real GDP growth in 2022 and 1.7 percent in 2023, with inflation peaking in the second quarter.

“Real GDP will return to growth in the second quarter as trade, inventories, and government spending become less of a drag. But growth is moderating as the economy transitions from a breakneck-fast recovery in the second half of 2020 and 2021 to a slower expansion in 2022,” Comerica Chief Economist Bill Adams wrote in the May 11 outlook, which also expects further interest rate increases throughout the year.

The Federal Reserve will continue increasing interest rates throughout this year and next year to fight high inflation, according to University of Michigan economists whose baseline expectations see “the Fed successfully steering the economy to safety.”

“Consistent with our inflation and labor market outlooks, we expect the Fed to begin cutting rates again in 2024,” economists wrote.

University of Michigan economists project a 7.8-percent inflation rate for 2022 and 3.8 percent in 2023, followed by 2.6 percent in 2024.

“A shift in demand from goods to services, persistent rent increases, and pass-through from food and energy prices keep core inflation high through 2023. The impact of the war in Ukraine on food and energy prices contributes to headline CPI inflation running way ahead of core in 2022,” University of Michigan economists wrote in the outlook. “By late 2023, the inflation outlook improves enough to facilitate monetary policy easing.”

Unemployment is expected to remain low at 3.6 percent for both 2022 and 2023, and light vehicle sales will likely remain strong, growing from a projected 15.1 million units this year to 17.1 million in two years, according to the updated University of Michigan outlook.

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