U.S. economy back on track, but labor market, inflation are concerns

The U.S. economy will grow at about 9.3% this quarter, then growth will decelerate but still post a strong 6.3% GDP gain on the full year.

That’s the most recent assessment from Bill Witte, macroeconomist with industry forecaster FTR. He said the second half will see growth of about 4.8%, before it slows to a more normalized 2.5% in 2022.

The labor market will continue to be a challenge in the U.S., Witte added.

“My feeling is, and my model is saying, the progress in bringing unemployment down is going to be slower than what we thought six months ago,” he said, adding unemployment in the U.S. isn’t likely to reach pre-pandemic levels anytime soon. In fact, he said employment won’t return to pre-pandemic levels until beyond 2022.

While GDP is close to pre-pandemic levels, the labor market won’t fully recover until the end of 2023, Witte said. By the end of 2022, the U.S. economy will have five million fewer employed than it did pre-pandemic, he added.

Avery Vise, FTR’s vice-president – trucking, pointed out consumer spending in the U.S. has reached pre-pandemic levels, thanks largely due to stimulus. Spending on goods is about 18% above levels seen in February 2020, while spending on services is about 3% below pre-pandemic levels.

That should change as restaurants and events begin to reopen. Looking at the implications on freight, Vise noted durable goods spending is up about 30%, which could dampen freight demand next year and beyond. Durable goods, by definition, are long-lasting items.

“If we have a huge share of American consumers purchasing durable goods at the same time, doe sit potentially set up the economy for a cyclicality in durable goods spending we’ve never seen before?” he wondered.

That’s where supply chain issues could be a good thing, he added. “To the extent people can’t buy items because they can’t be built, that might actually smooth that out a little,” he said.

Witte said supply chain issues largely stem from isolated incidents, such as a semiconductor factory fire in Taiwan, winter storms in Texas, and more recently the hacking of the Colonial Pipeline. So, he anticipates those issues being worked out soon.

“The supply chain problems right now are probably temporary,” Witte said. “If they turn out in some crucial areas to be extended, then there may be more to worry about.”

Witte does, however, worry about inflation. While a rising Consumer Price Index (CPI) is being downplayed by some, Witte said inflation risks shouldn’t be ignored. Vise pointed out steel prices rose monthly 19% in February, 25% in March, and another 27% in April. Lumber is on a similar trajectory. This too, could weaken freight demand.

“If consumers face higher prices, that means even if they spend as much or more than what they’re spending [now] they’re getting fewer goods, which translates into softer freight demand,” he reasoned.

Witte is concerned by rising wages, which are translating into more expensive goods and services and are not likely to be reversed.  

“The danger with inflation is when it starts to become a built-in kind of thing,” he said. “Wages go up, firms raise prices, workers want higher wages. It’s not an event, it’s a process and once it gets started, we are in trouble.”

Traditionally, Witte said, the Federal Reserve’s approach to inflation is to “take away the punch bowl just as the party is getting started.” But, he added, “The party I think could be getting started and the Fed has no intention right now of taking away the punch bowl. That’s a concern.”