December 2021 U.S. Economic Outlook

Robert A. Dye, Ph.D.

Economic Chart

Omicron Increases Uncertainty As Fed Prepares Course Correction

COVID variant Omicron, the latest lurching step from pandemic to endemic COVID, has increased economic uncertainty at the end of 2021. The new variant has already had a negative economic impact as international travel gets throttled back in the midst of the usually hectic holiday season. Financial markets have been jittery. The policy response has been flinching. The extent to which Omicron grows as an economic force depends on many factors, including global geography and the willingness and ability of governments to fine tune policy as more facts emerge. In our final U.S. forecast of 2021, we maintain our assumption that Omicron and other new strains of COVID will not require large scale closures of businesses and restrictions on daily activity in the U.S., as the initial wave of COVID did in the spring of 2020. 

Coincident with the emergence of Omicron, Federal Reserve monetary policy has also emerged as a source of economic uncertainty. We expect monetary policy uncertainty to be marginally reduced as a result of the upcoming Federal Open Market Committee meeting over December 14/15. At the conclusion of the meeting we expect FOMC chair Jay Powell to announce that the Fed will begin to taper their purchases of Treasury bonds and mortgage backed securities at a faster rate as early as mid-December. Along with the expected confirmation of a faster rate of tapering, we also expect to see a new Dot Plot on December 15 that will show a marginal upward shift in the dots for year-end 2021 and year-end 2022. This would indicate that the Fed is growing increasingly concerned about persistent inflation and wishes to shorten the runway for eventual lift-off of the fed funds rate from the zero lower bound. Therefore, we have adjusted our long-held forecast for interest rate lift-off. In our December forecast we show two fed funds rate hikes in 2022, the first coming in September and the second in December. It is possible that we will amend the forecast after December to show lift-off coming even sooner, perhaps in July of 2022. 

To complicate matters even further, we saw payroll job growth for November fall well short of expectations as 210,000 net new jobs were added for the month. Normally this would be a considered a solid number, but there remains a widespread expectation that we will quickly bounce back to pre-COVID levels of employment, and so “only” 210,000 net new jobs in November challenges that assumption. The expectation of a quick jobs bounce back needs to be-reexamined. The jobs miss in November underscores the very complex nature of the labor market right now. We are still seeing the lingering consequences of the quick two-step of shutdown and reopen from 2020, combined with a “normal” recessionary adjustment of labor demand. The combination of shutdown/reopen and the recent tendencies for slow job growth in the early years of economic recovery may result in a slower-than-expected recapture of pre-COVID payroll levels, complicated even further by “the great resignation”. Added to all that is the unexpectedly quick drop in the unemployment rate to 4.2 percent in November.

At year end 2021, the Fed will try to optimize interest rate policy in the face of persistent inflation, weaker-than-expected job uptake, plus a lower-than-expected unemployment, certainly a unique set of circumstances. 

We continue to expect strong real GDP growth for 2022. Interest rates will remain near-zero through the first half of the year. Supply chain constraints will gradually unwind, easing pressure on prices. Inventories will get rebuilt. Fiscal policy will be expansive.

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December 7, 2021
Robert A. Dye, Ph.D., Senior Vice President and Chief Economist at Comerica Bank

Robert A. Dye, Ph.D.

Senior Vice President and Chief Economist

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